Business Organization - Partnership

A partnership is a voluntary association of two or more people for the purpose of operating a business. Each person contributes money, property, labor or skills, and shares in the business profits and losses.

A general partnership is similar to a sole proprietorship with respect to taxes and liability. Each general partner has unlimited personal liability for all debts and obligations of the partnership and acts of the partners, even if he or she is not directly involved in a particular debt or decision. 

Although a partnership is not a taxable entity, total income must be reported on IRS Form 1065, which provides information on partnership income or losses for the year. Partners must also report their share of the partnership income--gains, losses, deductions or credits--on their respective individual tax returns. Even if the partnership income is reinvested in the business rather than distributed to the partners, it must be reported on each partner's individual tax return. The social security tax for partners is similar to that for sole proprietors. Keogh and SEP retirement plans are available to partnerships. 

A partnership can be formed with an oral or written agreement. A written agreement is recommended to help avoid misunderstandings among the partners. Attorneys recommend that, at a minimum, the following should be included: 

• · Names and addresses of the partners and the name of the partnership 

• · Purpose of the partnership 

• · Duration, events resulting in termination of the partnership and the rights and obligations of the partners on termination of the partnership; how partnership assets are to be divided when the partnership is terminated 

• · Who is contributing what resources (cash, personal property, real estate, labor and services) and how they will be contributed (outright to partnership, on a use-only basis or rental) 

• · How profits and losses will be calculated and shared 

• · How decisions are to be made 

• · Any limitations on the activities of the partners 

• · How to add new partners and how to buy out partners 

• · How to resolve disagreements among the partners (dispute resolution by a third party)

There are three kinds of partnerships recognized in Montana--general, limited liability and limited. 

In a general partnership, two or more people contribute assets to the partnership, and these general partners share the management, profits and losses. The general partners manage the business and are personally liable for all partnership debts and liabilities and acts of any of the partners. 

At the death or withdrawal of one of the general partners, the partnership may be subject to dissolution. If a partner dies, that partner's interest is subject to probate, federal estate taxes and inheritance taxes. The partnership agreement may include provisions for business continuity by requiring the partnership or the surviving partners to purchase the interest of the deceased partner. Buy-sell agreements among the partners or between the partnership and a partner can also be used to provide a market for the interests of a deceased or withdrawing partner. 

By registering as a limited liability partnership, a partner limits his or her liability except for the partner's own negligence or the negligence of someone under the partner's direct supervision. 

The limited partnership is a way for the general partner(s) to acquire additional capital without giving up management control. It must include at least one general partner and one or more limited partners. A certificate of limited partnership must be filed with you state. Limited partners take no active role in the management of the business, and their liability is limited to the extent of their partnership investment. 

Limited partnerships can allocate a percentage of gross receipts to the general partners as a "cost" for management and use such costs as a deductible expense in computing profits and losses for the limited partnership. Profits or losses are then typically allocated to limited partners based on their percentage of ownership.