Eligibility to be Partner, Relationship of partners

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 Formation of Partnerships

A partnership is a business arrangement where two or more individuals share ownership and responsibility for the business. While partnerships can be formed verbally, it's advisable to have a written partnership agreement that covers essential aspects such as:

  • Rights and Responsibilities of Each Partner: Defines the duties and privileges of each partner within the business.
  • General vs. Limited Partners: Specifies whether partners have unlimited liability (general partners) or limited liability (limited partners).
  • Profit/Loss Distribution: Outlines how profits and losses will be shared among partners.
  • Withdrawal of Funds: Procedures for withdrawing funds from the partnership and any limitations on such withdrawals.
  • Decision-Making: Procedures for making key business decisions and resolving disputes.
  • Adding and Terminating Partners: Guidelines for admitting new partners or handling partner exits.
  • Death of a Partner: Procedures for handling partnership interests if a partner passes away.
  • Dissolution: Steps to dissolve the partnership, including distribution of assets and liabilities.
  • Liquidation: Distribution of remaining cash or assets after dissolution.

Other Formation Activities

In addition to the partnership agreement, partners must undertake various administrative tasks:

  • Registering the Business Name: Ensuring the partnership operates under a legal business name.
  • Obtaining an Employer Identification Number (EIN): Required for tax purposes and hiring employees.
  • Obtaining Necessary Licenses: Compliance with local, state, and federal regulations.
  • Opening a Bank Account: Establishing a dedicated bank account for partnership transactions.
  • Filing Annual Informational Returns: Obligation to report partnership income to tax authorities.

Kinds of Partners

Partnerships involve different types of partners based on their roles and involvement:

  • Active or Managing Partner: Actively participates in business operations and management decisions.
  • Sleeping or Dormant Partner: Contributes capital but does not participate in day-to-day management.
  • Nominal or Ostensible Partner: Lends their name to the partnership without contributing capital or engaging in management.
  • Partner by Estoppel or Holding Out: Represents themselves as a partner to third parties, thereby assuming liability.
  • Partner in Profits Only: Shares in profits but not in losses beyond their agreed contribution.
  • Minor as a Partner: Can be admitted to partnership benefits with consent but has limited liability until adulthood.
  • Other Types: Includes secret partners, outgoing partners, and limited partners (in limited partnerships).

Authorities, Rights, and Liabilities of Partners

Partners' rights and obligations are typically outlined in the partnership agreement or governed by partnership laws:

Rights of Partners

  • Management Participation: Right to participate in business management decisions.
  • Consultation: Right to be consulted on important matters affecting the partnership.
  • Access to Records: Right to access partnership books and records.
  • Equal Profit Sharing: Unless otherwise specified, partners share profits equally.
  • Interest on Capital: Entitled to interest on capital contributions exceeding their share.
  • Indemnification: Right to be reimbursed for expenses incurred for partnership purposes.
  • Dissolution: Right to initiate partnership dissolution under appropriate circumstances.
  • Use of Partnership Property: Ensures partnership assets are used solely for business purposes.

Obligations of Partners

  • Diligence: Duty to conduct partnership affairs with utmost care and diligence.
  • No Remuneration: Generally not entitled to salary unless specified in the partnership agreement.
  • Indemnification: Duty to compensate the partnership for losses due to negligence or fraud.
  • Account Keeping: Must maintain accurate records and allow partners access to them.
  • Non-competition: Prohibited from engaging in competing businesses without partnership consent.
  • Scope of Authority: Bound to act within the authority granted by the partnership.
  • No Secret Profits: Must disclose and return any profits made through partnership dealings.

Conclusion

Understanding these aspects is crucial for establishing and managing a partnership effectively. Partnerships offer flexibility but require clear agreements and adherence to legal responsibilities to operate smoothly and mitigate potential conflicts. Each partner's role, rights, and obligations contribute to the overall success and stability of the partnership entity.