Business Structures

What is a Limited Partnership?

1. An association of 2 or more persons carrying on business as co-owners for profit with one or more General Partners and one or more limited partners. 2. Association- voluntary 3. Need not be natural persons 4. To carry on for an indefinite period of time with no fixed end point 5. At least one General Partner and one Limited Partner

What are the steps to terminate or wind up a Limited Partnership business?

1. Notice to customers, clients and people they do business with. 2. Complete pending business 3. Do not accept new business 4. Marshall the assets and figure out what the business is worth 5. Identify all known debts 6. Identify all assets 7. Appoint a liquidator and start liquidation process to generate cash 8. Identify all known creditors- preferred (government gets paid first), non preferred 9. Pay off all known debts 10. Pay off General Partners and Limited Partners Capital Interest 11. Anything left gets split as profits according to percentage allocation

How is the taxation of the General Partnership business handled?

1. The General Partnership Business does file a tax return Form 1065, but it is for informational purposes only. The General Partnership business does not pay income tax. 2. Use Schedule K to calculate profit/loss of General Partnership business 3. Use Schedule K-1 to notify each General Partner of their profit/loss for the tax year 4. Each individual General Partner must attach Form K-1 to their individual tax return 5. Each individual Partner pays tax on income from General Partnership based on their own income tax rate. This may be viewed as tax advantage as % tax rates for individuals usually lower than rates for corporations. 6. If General Partnership business reports a loss each Partner may use that loss to offset other personal income. Limited to number of years the IRS will allow General Partnership business to report losses.

What are the steps to terminate or wind up the general partnership business?

1. The first step is notice to customers, clients, people they do business with. 2. Complete/finish pending business 3. Do not accept new business 4. Marshall the assets of the business and figure out what the General Partnership business is worth. 5. Identify all known debts and obligations 6. Identify all assets 7. Appoint liquidator and start liquidation process to generate cash/capital (can be a partner, it depends on the motivation of the person, they need to motivated to maximize the $ amount of the liquidation) 8. Identify all known creditors, preferred (get paid first)and non-preferred (government always goes to the front of the line). 9. Payoff all known debts 10. Payoff partners capital interest 11. Anything left gets split as profits according to % allocation

What are the steps of a dissolution?

1. The first step is notice to customers, clients, people they do business with. 2. Marshall the assets of the business and figure out what the General Partnership business is worth. 3. Identify all known debts and obligations. 4. Identify all assets. 5. Figure out what amount the Dissociated Partner is entitled to receive of capital and profits.

How many days does a Partnership have to decide what to do if a Partner dissociates?

90 days

How long do the remaining Partners have to decide if they will carry on the business?

90 days for remaining partners to decide if they will carry on the business as a new General Partnership or liquidate & terminate the partnership.

What is the difference between a General Partnership and a joint venture?

A General Partnership is a business to carry on for an indefinite period of time. A joint venture ab agreement to carry on for one or a limited number of transactions.

What is Entity theory?

A General Partnership is a separate business entity that operates independent of its partners. The business or the firm is the Principal and each partner is an Agent.

If a Limited Partner leaves does it result in the dissolution of the Limited partnership?

A Limited Partner may come or go without the Limited partnership having to go through dissolution

What is a joint venture?

A joint venture is an association of 2 or more persons as co-owners in a business for profit for a single or limited number of fixed transactions.

How do you decide the profit sharing interest of each Partner?

Allocation of profit sharing interest can be divided however the Partners agree on, and this would written into the Partnership Agreement. For example 50%, 30%, 20%

What is a General Partnership?

An association of 2 or more persons who agree to carry on as co-owners a business for profit.

What are both classes of owners in a Limited Partnership entitled to?

Both have capital and profit sharing interests

If the General Partnership fails how do creditors look to satisfy outstanding debt?

Creditors must 1st exhaust all General Partnership business assets. Creditors may then look to General Partners personal assets to satisfy outstanding debt.

What is the financial liability for a General Partner?

Each Partner has unlimited personal financial exposure, if the General Partnership business fails.

Are Limited Partners creditors?

Limited Partners are not creditors unless you give them that status in your Partnership Agreement.

What is a Limited Partners financial exposure?

Limited Partners have only stand to lose their investment they have no individual personal financial exposure.

Are Limited Partners entitled to attend the Limited Partnership meetings?

Limited partners have the right to ask for/attend/vote at Limited Partner business meetings.

Taxation of a General Partnership and Limited Partnership are similar, how are they different?

Losses can be used to offset other income, but if you are a Limited Partner it can only be used to offset other passive income. Limited Partnerships fall into the Partnership group of taxpayers unless they elect to be taxed as a Corporation.

How do you distinguish between partnership property and personal property?

Partnership property is distinguished in your agreement. What property is the General Partnerships property and what remains the property of the individual partner. There should be a clear distinction when operating your General Partnership which you attach to your General Partnership Agreement. A separate schedule listing property not owned by the General Partnership.

Each General Partner is entitled to the right of indemnification. What does this mean?

Reimbursement for out of pocket expenses. To be held harmless if sued. Be sure indemnification language is included in your Partnership Agreement.

Does the Dissociated Partner still have financial liability?

The Dissociated Partner may also have some concerns about continuing personal financial liability even after they leave the General Partnership business for a period of up to 2 years after they leave. You can negotiate this exposure as part of the exit plan.

How much profits do the Partners have to leave in the business?

The Partnership Agreement can specify how much of the profits they have to leave in the business. It is a good idea to put this clause into the Partnership Agreement.

What does the Capital account reflect?

The amount of money each Partner has invested in the business.

What form does the capital contribution have to be in?

The capital contribution may be in cash (usual form), property or services. No rules prohibit the form of the contribution. It is up to the partners to agree and if they accept then it is legally OK.

What is the Capital contribution?

The money paid by a General Partner to become a partner in the General Partnership business or the "buy in".

What are the General Partners?

The owners of the General Partnership.

If the remaining Partners decide to carry on the business, what must they do?

The remaining General Partners may choose to carry on the business after a Partner leaves. Must create a new General Partnership.

If 3 Partners are entitled to an equal share of the profits in a General Partnership and have appointed a managing Partner who will draw a $500 per month salary for his services, how will this be handled?

The salary comes out of the profits before they each take their share. Partners do not get paid until all of the help and all bills have been paid. Must cover all expenses before they realize any profits.

How many people have to be in a Partnership?

There has to be at least 2 or more persons. They need not all be "natural persons". A Partner can be someone other than a human being. Another business or corporation could be a partner.

How many votes do a General Partner and a Limited Partner get?

They each get one vote. General partners are not entitled to more votes than Limited Partners unless it is in the Partnership Agreement.

If a Limited Partner acts as a General Partner what happens?

They forfeit their right to protection from financial exposure.

What is meant by the term "carry on"?

To "carry on" means for indefinite period of time. The plan is long term.

Are the Partners entitled to salary or wages?

Under the Uniform Partnership Act and the revised UPA, the rule is Partners are not entitled to salary or wages. Partners are paid a percentage or share of the profits unless your Partnership Agreement provides for salary or compensation.

What must the General Partnership do when a Partner leaves the business?

Whenever a General Partner leaves the General Partnership business, the General Partnership business must go through the process of dissolution

What are the causes of the dissolution of a General Partnership?

a. by agreement of partners b. death of a gp c. bankruptcy of a gp d. expulsion of a gp e. disability of a gp f. By Operation of Law- the operation of the business becomes illegal due to a change in law, to continue the business would be in conflict with the law. g. By Court Order- Judge may upon good grounds, for good cause grant Order dissolving a partnership. Must be done on Petition of one of the existing general partners.

How can a Partner increase their capital account?

Can increase their Capital Account by leaving their profits in the business.

What is a Partnership Agreement?

A Partnership Agreement is a contract and its purpose is to satisfy all rights & responsibilities, duties and obligations of the General Partners. it is not required by law, but it would be foolish not to have one.

What is Aggregate theory?

A Partnership is a collection or group of persons who conduct business together. Each individual Partner or owner has unlimited personal financial exposure. Each is an Agent of the business and owe each other and the business fiduciary duty.

What do all good Partnerships start and end with?

A good Partnership Agreement

What does association mean?

An association means it is voluntary by agreement

Are Limited partners able to participate in the running of the Limited partnership business?

By Statute the Limited Partners are prohibited or not allowed to actively participate in the management of the Limited Partnership business. "Silent Partners"

What is a Capital account?

Capital account reflects the amount of money each Partner has invested in the business. The Partnership Agreement should provide for a Capital account where they keep track of the money paid in to start up and run the business.

Each General Partner has what interests in the General Partnership?

Capital interest- the amount put into the business, and a profit sharing interest in the General Partnership business.

What is Co ownership?

Co-ownership is General Partners in which each own an undivided fractional interest or percentage of the whole thing. Cannot distinguish who owns which portion of the business. They own the whole thing together. They cannot sell, assign, give away their percentage of the business without the consent and permission of the other General Partners. Cannot use the assets of the business for personal use without the permission of the other Partners.

What is a Dissociated Partner?

Dissociated Partner is any General Partner who leaves the General Partnership business. Resigns, retires, dies or is significantly disabled, personally bankrupt, expelled or kicked out for breach of fiduciary duties or bad conduct.

Who has voting rights in the General Partnership?

Each General Partner has voting rights for the General Partnership business. The rule is 1 vote per Partner regardless of the amount of the capital contribution. Equal voting rights. Can you adjust the weight of the votes? Yes, but you must put it in your Partnership Agreement.

Who has the right to manage the General Partnership business?

Each Partner has a right to actively participate in management. It depends on the size and the nature of the General Partnership business, but it is a good idea to designate a Managing Partner. Your partnership agreement should clearly provide for the role of a Managing Partner. Duties and responsibilities, compensation, accountability. Reporting requirements. You may want to place limits or restrictions on authority of the Managing Partner. For example spending limit up to a certain amount. Anything higher needs the consent of the Partners.

What are the duties of the Partners?

Each Partner owes each other Partner a Fiduciary Duty- this duty also extends to the Entity the General Partnership business.

Limited Partners are allowed to do certain things called "Safe Harbor" activities without giving up their protection from financial exposure. What are they?

Example to be a consultant for the Limited Partnership and be paid to do it Be an employee or Agent of General Partner Be a surety (guarantor, risk personal assets, co-sign) for the Limited Partnership business Request, attend and vote at all meetings Initiate a lawsuit on behalf of the Limited Partnership to protect their investment

What is an expelled Partner entitled to?

Expulsion for misconduct the partner is still entitled to their personal property right, return on capital investment, and share of profits, but to be adjusted by any damage caused for example expense, loss, legal fees to get rid of Partner.

What are the two classes of owners in a Limited Partnership?

General Partners and Limited partners

What meant by joint and several liability?

General Partners have joint and several liability. Creditors can get the money from one Partner or all of the Partners.

What if your Partnership Agreement is silent?

General Rule is if your Partnership Agreement is Silent then all Partners share equally in Profits & Losses- if you intend disproportionate allocations you must put it in your agreement.

How does the IRC define allocation of profits and losses for a General Partnership?

IRC code Sec 704(b) says in part, Factors: a. show a presence of a business purpose for the allocation b. are related items of gain/loss from same source and subject to same % allocation c. allocation made without recognition of normal business factors d. allocation cannot be done after profits/losses estimated e. what is the duration of the allocation? This tax year? Indefinite? f. overall tax consequence of allocation

What happens if after dissolution they decide to add a new partner to the General Partnership?

If they decide to add a new partner then the new partner is not responsible personally for existing debt of the General Partnership business, but new partner would stand to lose capital investment if General Partnership business fails. New partner will be required to make Capital Contribution.

What does a Limited Partnership need to file?

If you start your business as a Limited Partnership you are required to file a Limited Partnership Certificate with County Clerk of where your principal business is located (mandatory)

Can a Limited Partnership convert to a Limited Liability Partnership?

It is possible for the Limited Partnership business to register or convert to a Limited Liability Partnership as long as there are enough assets to pay off all known debt.

What is the Capital distribution of each Partner?

Money, goods or services, or a combination of all 3 that each Partner contributes.

If a Partner does not make a monetary contribution to the Partnership, but provides something else of value to the Partnership (Mama's secret recipe) what must the Partnership do?

Must clearly indicate the value of the contribution in the Partnership Agreement.

What are the disadvantages of registering your general Partnership as a Limited Liability Partnership?

Must file for Limited Liability Partnership status with government. To qualify for Limited Liability Partnership status must have available assets on hand to satisfy all outstanding debts. Need sufficient cash reserves.

How many General Partners do you have to have in Limited Partnership?

Need at least one or more General Partners

What are the advantages of registering your General Partnership as a Limited Liability Partnership?

No longer jointly and severally liable. If the creditors go after one of the General Partners, then that Partner has a claim against the other Partners. General Partners are protected from financial exposure, but the General Partner who was involved in transaction or event that caused the business loss remains personally liable. The remaining General Partners can sleep easily.

What are examples of breach of fiduciary duty?

Not accounting for profits. Not taking due care of General Partnership business assets. Compete with General Partnership business. Not give General Partnership business devoted attention or efforts are diverted elsewhere. Not making full disclosure to other partners of relevant information. Not carrying out duties in a reasonably prudent manner.

Is it mandatory to have a Limited Partnership Agreement?

Not mandatory, but a good idea to have a Limited Partnership Agreement Specify role of General Partner- duties, responsibilities, compensation Allocate profits/losses List Capital Account contributions On separate schedule list personal property that remains personal property Exit plan- especially if General Partner dissociates General Partner is critical to operation of Limited Partnership

If a Partner loans the business money as a creditor what happens to their capital account?

Partner can loan business money as a creditor which does not add to his Capital Account.

What 3 things does a Partner have a right to in the General Partnership business?

Right to return on investment (Capital Interest) Right to share in profits (%) Right to share in management

What is dissolution?

Termination of right to do business

What is a Dissociated Partner entitled to?

The Dissociated Partner still retains his or her personal property rights in the General Partnership business and is still entitled to a return on investment or capital interest and a percentage of the profits.

In a Limited Partnership, what is the General Partner responsible for?

The General Partner is responsible for management, control and supervision of the Limited Partnership business The role of the General Partner is to serve as the manager of Limited Partnership business

Can General Partners protect with insurance?

To some extent, but no insurance for business failure or for bad business decisions. Liability insurance or professional malpractice insurance. "Key person" insurance to insure against death or disability of General Partner. Recommended.

Can you put a non compete clause in your general Partnership Agreement?

Yes, the Partnership Agreement should have a non compete clause.

How does a General Partnership allocate profits and losses?

Your Partnership Agreement can allocate profits and losses in any reasonable manner as long if subject to IRS audit they can be economically justified. Losses follow profits, if you are entitled to 50% of the profits, then your obligation is to 50% of the loss. Any allocation of profits and losses is ok as long as it is not a tax avoidance scheme. (one person responsible for way more losses than the others to avoid paying taxes.)

What are some good things to have in an exit plan?

a. Make your exit plan part of your business plan and Partnership Agreement. b. Agreement to pay, set up terms c. Key person insurance for unexpected death or disability d. Liability or malpractice insurance e.. Penalty for Partner if expelled due to misconduct. f. Notice if resign or retire, amount of time to give g. Non compete clause, as long as language is reasonable h. Prohibited withdrawal period i. transition from FT to PT j. Hold harmless or indemnify k. right of first refusal