Agribusiness Library

LESSON L060007: PARTNERSHIPS

Objectives1. Define and examine the distinguishing characteristics of a partnership.

2. Describe special types of partnerships.

3. Identify components of a partnership agreement.

4. Compare and contrast the advantages, disadvantages, and considerations when developing partnerships.

Terms•At will partnerships

•Capital contribution

•Limited liability company

•Limited partnership

•Manager

•Membership interest

•Operating agreement

•Partnership

•Shares

•Silent partner

•Unlimited liability

A partnership is a form of business where two or more people go into business together.

A. Partners pool their money to start the business.

B. A written agreement that specifies partnership terms is needed. It explains the responsibilities of each partner and what

percent of the business each owns.

C. Profits and losses are divided as agreed.

D. The partnership may own property.

E. Partners share unlimited liability, so they share responsibility for debts and for wrongful acts. 1. Each partner is responsible for the partnership’s

liabilities. 2. Each partner is liable for the other partners’ wrongful acts

as a partner.

F. Records are necessary. In a partnership, it is necessary

to file a partnership tax return and to pay taxes individually.

G. A partnership is normally dissolved upon the death of a partner.

Limited partnerships and limited liability companies

A. A limited partnership is a work relationship with an individual (silent partner) who provides capital but has no decision-making powers; the person is only liable for the amount invested.

B. A limited liability company (LLC) is a legal form of business offering set losses to owners to the point of their capital contribution— personal money invested.

1. All LLCs must have at least one member. 2. LLC members are the owners of the LLC.

3. A member’s ownership in just one LLC is called a membership interest. Membership interests are often divided into standardized

units which, in turn, are often called shares—units to equally divide portions of the business for control of decision making.

The person with the largest member proportion is referred to as the manager.

The manager runs the day-to-day operations of the LLC.

4. LLCs must file their existence with the secretary of state in the state where the business is organized. The LLC must register its

name and clearly state its business purpose.

5. LLCs will be assessed fees by the state, and membership interests may be regulated by state and federal governments.

6. An agreement must be developed, usually by an attorney. This operating agreement is a document that determines,

defines, and sets the rights of the partners; it also distributes income received from the partnership.

7. Taxation of partnership LLCs are the same as regular partnerships.

8. Advantages of LLCs a. People are protected from

liability for the acts or debts of other partners.

b. LLCs prevent double taxation. 9. Disadvantages of LLCs

a. There is difficulty in raising capital because investors (banks) are unable to recover the personal assets of the partners.

b. Some states levy a tax for LLC partnerships.

A partnership agreement is a document that all partners agree to and to which all are held accountable.

An agreement is similar to a contract between members of the business.

A. It is common for agreements to contain five articles, usually drawn up by an attorney.

1. Article 1 states the nature of the partnership, type of business, name of business, duration of partnership, and registration of business when expanding to other states. It also establishes the

principal place of business.

2. Article 2 contains details about financial matters, specifically stating capital contributions of partners in addition to details about loans and accounting. It sets the fiscal year, annual report guidelines, profit and

loss statements, division of profits and losses, and account details.

3. Article 3 sets the rights and duties of partners. This article states management responsibilities, the

proper handling of money in banking, reimbursement procedures, and the proper handling of debts and outside activities.

4. Article 4 states membership changes. Sections include details about

new partners, ownership transfers, dissolution of the partnership, partner removal, and the sale of partnership rights.

5. Article 5 is set aside for miscellaneous purposes as established by the partners.

B. The agreement is signed by all partners and must be consulted if any partnership changes are made.

Partnerships A. There are a few advantages of a

partnership. 1. The capital of each partner is pooled. 2. The knowledge of each partner is

shared. 3. Labor and management

responsibilities can be divided among the partners.

4. The business risk is shared.

B. There are a few disadvantages of a partnership. 1. Partners may not agree on decisions that need to

be made. 2. Death or illness can cause the dissolution of the

business. 3. There is unlimited liability among the partners. 4. Each partner is personally liable for business

debts.

C. Considerations when developing a partnership:

1. It is necessary to use tolerance and understanding in a disagreement with a partner.

2. Partners often have different goals for the business.

3. Disagreements usually are about trivial things. 4. Trust between the partners can be tested.

5. All members must agree to admit a new member into the partnership.

6. Partnerships usually have specified years of existence. If they do not, they are referred to as at will partnerships

—partnerships that may be dissolved or modified at any time.

7. Homes are closely tied to the business. 8. The issue of unlimited liability is of great

concern.

REVIEW•How does a partnership work?•What are the special types of partnerships?•What are the components of a partnership agreement?

REVIEW•What are the advantages of a partnership? What are the disadvantages of a partnership? What considerations should be considered when developing a partnership?