Types and formation of partnerships

Sources of partnership law

What is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?

The form and organisation of partnership-like structures are controlled at the state level, with laws structured and codified similar to state laws governing other corporate forms. Each state typically delegates the administration of these laws to one or more government agencies within the state executive branch, who ultimately report to the state governor. Governing agencies may establish further regulations, guidance and rules related to the registration, governance, reorganisation or termination of partnerships and companies.

Where a state’s relevant partnership laws are silent, the relationship between partners is generally governed by the state’s laws pertaining to contracts.

A partnership may be governed by the laws of a state other than those it primarily transacts business in.

Types of partnerships

Identify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?

General partnerships are used where each partner will take an active role in the organisation’s management and operations. Unless the partners agree otherwise (typically in writing), a partnership will be legally considered to be a general partnership.

Limited partnerships are used where one or more ‘limited partners’ will not take an active role in management and operations, but will otherwise contribute capital, assets or some other value. One or more ‘general partners’ actively manage the organisation.

Limited liability partnerships (LLPs) allow each partner to engage in the management of the business while limiting liability to his or her own actions. This form may be restricted within a state to regulated professions, typically lawyers and accountants.

Limited liability companies (LLCs) are quasi-corporate partnership structures that allow owner ‘members’ to directly manage the operations of the organisation, or to designate one or more employee ‘managers’ to do so. LLCs have the benefit of insulation from liability afforded a body corporate, with fewer filing and formal governance obligations.

Joint ventures are partnerships of one or more businesses, typically for a limited period or purpose. Joint ventures are most typically organised as general partnerships, limited partnerships or LLCs.

Team or teaming arrangements may be joint ventures or contractual relationships between one or more parties (natural persons or organisations), typically for a limited period, for the purpose of winning and performing on contracts with government entities. Teams can be formally administered under government-sponsored mentorship programmes or they may be privately arranged.

C corporations are formal business structures that may include one or more classes of shareholders, or part-owners, who delegate management decision-making to a board of directors (each of whom may also be a shareholder). Directors may further delegate management and operations to one or more employee executives (who may also be shareholders or directors).

S corporations are corporations who must limit their shareholders to no more than 100 natural persons of United States citizenship.

Benefit corporations are for-profit corporations that also serve one or more public benefits or agree to abide by a designated code of conduct. Benefit corporations are not recognised in all states.

‘Tax-exempt’, ‘charitable’, ‘non-profit’ or ‘not-for-profit’ organisations are LLCs or corporations recognised by a state or federal government entity for serving a specified purpose that benefits the public. These organisations typically include schools, churches, museums and arts programmes, social welfare and environmental services, labour unions, guilds, and industry or professional consortia.

Differences between types of partnership

What are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?

A partner’s liability is generally proportionate to the level of control he or she will exert over the management and operations of the business.

General partnerships, limited partnerships and LLPs are not typically treated as bodies corporate. General partners in either structure have no limitation on liability, and are jointly and severally liable as natural persons for the acts of the partnership. Limited partners’ liability is limited to the proportionate value of their contribution.

LLCs are treated as bodies corporate and, as such, liability to the partner ‘members’ is limited.

Liability to partners in joint ventures, teams or teaming arrangements depend on the form and nature of the arrangements between the partners.

C corporations, S corporations and benefit corporations are bodies corporate with limited liability to owners.

Reasons for choosing a partnership structure

What are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?

Partnerships have historically been attractive for the ease of their creation, lack of taxation as a corporate entity and the ability to conduct business with relative informality in comparison with corporations. However, personal liability is often the greatest factor in deciding to not adopt a partnership structure.

LLCs combine the advantages of the partnership structure with the limitation of personal liability associated with a body corporate. Since laws enabling the creation of LLCs have become widespread, partnership forms have waned in popularity.

Formation (formalities and bars to formation)

How are partnerships and the similar structures available in your jurisdiction formed?

In most states, two or more persons conducting business together will be legally deemed a general partnership with respect to the business they transact, whether or not any formal registration is made with a governing agency.

To form a limited partnership, LLC or any type of corporation, the business must typically submit the following with an appropriate state government agency:

  • business name, form, general purpose, term, and state and date of formation;
  • any ‘DBAs’ (doing business as) or aliases under which the organisation is also transacting business;
  • address of the business;
  • address and identity of a person or business in the jurisdiction that may accept service of legal process;
  • identity of all owners;
  • identity of key management, if applicable (general partners, LLC managers, corporate officers); and
  • number of shares, if applicable.

 

Businesses wishing to do business outside of the state in which they are organised must typically file the same information in each state in which they transact business.

Companies wishing to organise as S corporations may only admit US nationals as shareholders, and must file a formal election to organise with the US Internal Revenue Service (IRS).

Entities that will hire any employees must also file for an Employer Identification Number with the IRS.

Law stated date

Correct on:

Give the date on which the above information is correct.

22 July 2020.