The partners share the ownership and control of the business. The partnership agreement should specify what percentage of the business and profits each partner owns, and a separate account should be set up for each partner, showing capital contributions, accumulated profits and losses, and withdrawals from the partnership.
In the absence of an agreement, each partner will generally be deemed to have an equal ownership interest in the partnership’s assets and liabilities, and an equal share of profits and losses.
The partnership agreement should also specify who will manage the business and how decisions will be made. Unless otherwise specified, all partners generally have equal control over the management of the partnership business. In this case, all the partners would have to consent and agree to all partnership decisions. But for legal purposes, any partner can make commitments and bind the partnership to contracts and obligations with third parties, even without the consent of the other partners.
In a limited partnership, the general partners are responsible for managing the business. The limited partners have an interest in the business, but are generally silent with regard to day-to-day management decisions.
Liability
In a general partnership, the partners are jointly and severally liable for the partnership. That is, all of the partners are liable together, and each partner is individually liable for all partnership obligations. A creditor of the partnership could make a claim against the personal assets of each and all of the partners.
In a limited partnership, the general partners are generally liable. But the limited partners are at risk for partnership obligations and losses only to the extent of their capital contributions to the partnership.
Continuity and Transferability
A partnership continues as long as the partners agree it will, and as long as all the general partners remain. In the absence of an agreement otherwise, the partnership will dissolve if a general partner dies or leaves the partnership. In this case, the partnership assets would have to be liquidated to pay creditors and distribute the balance among the partners.
The partnership agreement can include a provision for continuation of the partnership, even if one of the general partners dies or leaves the partnership, and can state whether partners are allowed to sell or transfer their interests in the partnership. When a partner leaves, there should be an accounting of that partner’s share of the assets and profits to date, and how they will be paid. If a partner is allowed to transfer a share of the partnership, he or she will be personally liable for any partnership losses up until the date of transfer.
The partnership agreement should also include a provision for bringing in new partners, if the exisitng partners wish to do so. If there is not an agreement, bringing in a new partner would probably result in the termination of the original partnership and the formation of a new one.
Taxes on Earnings
Profits and losses are allocated among the partners according to the partnership agreement, and in the absence of an agreement, they are allocated in equal portions. The partnership itself is not responsible for paying taxes. It files an informational return (Schedule K-1, Form 1065), and the partnership profits and losses flow down to the individual partners who each report their respective share of the earnings on their individual income tax returns. There are certain restrictions on using partnership losses to offset other personal income for federal income tax purposes. Partners must also pay self-employment tax on their share of the partnership income.