A partnership is a for-profit business association of two or more people. Because the business component is defined broadly by state laws and because "people" may include individuals, groups of individuals, companies and corporations, partnerships are highly adaptable in form and vary in complexity. Each partner shares directly in the organization's profits and shares control of the business operation. The consequence of this profit-sharing is that partners are jointly and independently liable for the partnership's debts.
Creation, organization and dissolution of partnerships are governed by state law. Many states have adopted the Uniform Partnership Act. A partner relationship is generally the result of a contract either express or implied with no formal requirements (such as a signed document). To determine whether a partnership exists, courts look at: (1) intention of the parties, (2) sharing of profits and losses, (3) joint administration and control of business operation, (4) capital investment by each partner, and (5) common ownership of property.
Under state agency law, partners are personally liable for torts committed by the partnership and its agents. (This is not the case of a limited partnership in which one or more general partners manage business operations and assume personal liability for partnership debts while other contributing/profit-sharing partners take no part in running the business and incur no liability beyond contribution obligations.) Limited partnerships are governed in many states by the Uniform Limited Partnership Act. State property law also impacts partnerships by defining ownership in a partnership and determining how the death of a partner changes the partnership structure.
Federal law plays a minimal role in partnership law except in the context of a diversity action or in instances where a partnership agreement contains an effective choice-of-law provision designating the application of federal law. Federal law also governs whether a partnership exists for federal tax purposes.
For state and federal tax purposes, a partnership is not a taxable entity. Partnership income is taxable to the partners in proportion to their share in the company's profits.
Last updated: Sept. 30, 2008
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