Articles

PARTNERSHIP

One type of entity to consider when forming a business or making an investment is a partnership.  A partnership is a separate legal entity, distinct from its partners, that has the power to conduct business in its own name.  These powers include, but are not limited to, the power to sue and be sued, acquire and dispose of real and personal property and hold title thereto, enter into contracts, and borrow and lend money.  Advantages associated with a partnership include characterization of the partnership as a pass-through entity for taxation purposes and flexibility in drafting the provisions of the partnership agreement which govern the affairs of the partnership.

GENERAL PARTNERSHIP versus LIMITED PARTNERSHIP

A partnership may be structured as either a general partnership or a limited partnership.  In a general partnership, each partner shares in the profits and losses of the partnership and has an equal right in the control and management of the partnership unless otherwise provided in the partnership agreement.  A limited partnership consists of at least one general partner (with rights similar to those of a partner in a general partnership) and one or more limited partners.  A limited partner has limited liability for the obligations of the partnership.  In exchange for this limited liability, the limited partner is generally not able to participate in the control and management of the partnership.

Formation of a General Partnership

In the Commonwealth of Virginia, a general partnership is formed upon the association of two or more partners to carry on as co-owners of a business for profit.  A partner can be an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government entity, or any other legal or commercial entity.

Formation of a Limited Partnership

In the Commonwealth of Virginia, a limited partnership is formed by filing a certificate of limited partnership with the State Corporation Commission.  The certificate of limited partnership is required to include the name of the limited partnership, the address of the initial registered office, the name of the initial registered agent, the name and address of each general partner, and the address of the specified office of the limited partnership.  The limited partnership is deemed formed at the time of filing the certificate of limited partnership unless a later date and time are specified in the certificate of limited partnership.  In addition to the initial filing fee for the certificate of limited partnership, a limited partnership is subject to an annual registration fee.

Conversion to a General Partnership or Limited Partnership

A general partnership may convert to a limited partnership by filing a certificate of limited partnership which includes information with regard to the former general partnership and a statement that the conversion was approved either in the manner provided in the partnership agreement for amending such partnership agreement or, if there is no partnership agreement, by all of the partners.  A limited partnership may convert to a general partnership upon approval by all of the partners and after the limited partnership cancels its certificate of limited partnership.

PARTNERSHIP AGREEMENT

A partnership (whether general or limited) usually has a partnership agreement which governs the relations among the partners, as well as between the partners and the partnership.  The Virginia Uniform Partnership Act will govern the terms of the relationship among the partners and between the partners and the partnership if there is no partnership agreement or if the partnership agreement fails to address a particular issue (for purposes of a limited partnership, the Virginia Uniform Partnership Act will only govern in any case not provided for in the Virginia Revised Uniform Limited Partnership Act).

Some of the matters which a partnership agreement may cover include the relationship between the partners, the rights and duties of the partners, the retirement and death of a partner, admission of new partners, and the dissolution, winding up, and termination of the partnership (however, this is not an exhaustive list).

LIABILITY OF PARTNERS

Each partner in a general partnership is personally liable for the obligations of the general partnership.  In a limited partnership, the general partners are liable for the obligations of the limited partnership.  Generally, a limited partner is not liable for the obligations of the limited partnership unless the limited partner participates in the control of the partnership (and then the limited partner is only liable to persons who transact business with the limited partnership reasonably believing, based upon the limited partner’s conduct, that the limited partner is a general partner).

PASS-THROUGH TAXATION

Partnerships do not pay income tax; however, partnerships are required to compute taxable income at the partnership level and file an information return.  The share of each partner in the income, gains, losses, deductions, and credits of the partnership will pass through to each partner and be included on each partner’s tax return, even if no distributions are made from the partnership to the partners.  A partner’s share of the partnership’s income, gains, losses, deductions, and credits is generally determined under the partnership agreement.  However, if the partnership agreement is silent or no partnership agreement exists, then the partner’s share is determined in accordance with the partner’s interest in the partnership.

TRANSFERABILITY OF INTERESTS IN A PARTNERSHIP

Except as otherwise provided in the partnership agreement, the transferability of a general partnership interest is restricted to the transfer, in whole or in part, of a partner’s share of the profits and losses of the general partnership and the partner’s right to receive distributions from the general partnership.  Similarly, limited partnership interests are assignable, in whole or in part, except as otherwise provided in the partnership agreement.  The assignment of either a general or a limited partnership interest generally does not entitle the person or entity receiving such partnership interest to become a partner or to exercise any rights of a partner.  The consent of all of the partners is generally required for one to become a partner of a general partnership.  A person or entity receiving a limited partnership interest can become a limited partner if all of the other partners consent or if the partner assigning the limited partnership interest has the authority under the terms of the partnership agreement to make one a limited partner and exercises such right.

TERMINATION

A partnership (whether general or limited) may be at will or for a definite term or particular undertaking.  The partnership agreement may specify when a partner’s dissociation or departure from the partnership triggers dissolution and termination of the partnership.  If the partnership agreement is silent, then the Virginia Uniform Partnership Act (in the case of a general partnership) or the Virginia Revised Uniform Limited Partnership Act (in the case of a limited partnership) will govern the dissolution, winding up, and termination of the partnership.

© 2010 GANDERSON LAW, P.C.