Dangerous Bedfellows
A general partnership exists in Massachusetts when two or more parties engage in a business for profit. No formal contract, agreement, or other documentation needs to be executed in order for a general partnership to be formed. The only thing that must occur for a partnership to exist under Massachusetts law is that the parties to the for-profit business engage in such a business, that the parties intend to engage in the business, do in fact share profits and losses of the business, and exert some degree of control over the business.
On its face, a partnership would seem to be a fairly innocuous thing. However, what is often missed by people or companies that enter into a partnership formally or informally is that each party has created massive potential for personal or corporate risk. The reason that risk is so high in a general partnership is because the general partnership provides no insulation against risk caused by the actions of other partners as might be found in a corporation (incorporating a business), an LLC, or other form of partnerships, e.g., limited partnerships or limited liability partnerships. In a general partnership, each partner is personally liable for any torts committed by other partners to the partnership. Tort liability, for example, could occur where the negligence of one partner in partnership results in harm to another party. The liable partner, as well as the other partners in the partnership, could be subject to his or her personal assets being the target of an award for damages by a court. For this reason, alternatives to a general partnership ought to be considered by any business owner in Massachusetts.
Partnership Options
The Limited Partnership
The limited partnership (LP) is formed by filing with the Secretary of State in Massachusetts. Once filed and accepted, the limited partners to the arrangement have some liability protection that is not afforded to the partners in a general partnership. Here is how this works. A limited partnership in Massachusetts is formed when one partner serves as a general partner, and the other partner or partners serves as limited partners. The general partner in the LP arrangement has full control over the company, and as a result, has full liability for any torts or other claims filed against the company. Because the limited partners are not involved with the control of the company, limited partners do not generally share liability for involvement in the company except for the risk of loss of capital contributions made to the company.
The limited partnership is typically arranged such that a corporation with a small amount of assets serves as the general partner, with other partners serving as the limited partners in the LP. The rationale for the company with few assets being chosen as the general partner is to make a less inviting target for plaintiff’s attorneys to pursue. When a company has few assets, and perhaps low or no insurance limits (if allowed by law for that particular company), that company is an ideal choice for a general partner in this business structure because there are few assets that could be the focus of an aggressive damage award.
Still, today limited liability companies (LLC’s) have largely replaced the limited partnership structure in Massachusetts, although LP’s still do exist as a means to create liability protection in a specific set of circumstances.
The Limited Liability Partnership
Yet another business structure which may be a viable option for a company in Massachusetts is the limited liability partnership or LLP. With the LLP business structure option, there are no general partners as exist in a general partnership or a limited partnership. Instead, in an LLP, all partners to the organization are limited partners. Practically speaking, by making all partners in the limited liability partnership limited partners, protection exists from the liability of the actions of another partner. This option is often chosen by companies which do business in multiple countries or states where LLC’s are not an option under laws of those states.
Issues in Taxation
Accountants are best positioned to offer advice related to taxation, and ought to be consulted by a business for specific answers to specific questions related to that business. With that said, as a general matter, each partner in a partnership pays income taxes to the IRS. Also, because each partner is considered to be self-employed in a partnership, each partner pays self-employment taxes in a partnership arrangement. In addition to federal income tax and self-employment taxes, partnerships are subject to taxes related to employees hired by the partnership, and other taxes. Again, a qualified accountant is the best source of information related to questions regarding specific taxes and taxation in general.
The Partnership Agreement
In addition to tax considerations and the ideal structural organization of the company, the matter of drafting a partnership agreement is a crucial component. The partnership agreement details every aspect of the relationship between partners. There are a vast number of issues that will be addressed in a comprehensive partnership agreement prepared by an attorney that range from the precise structure of the partnership to how profits and losses will be handled. Every partnership agreement is different. No boilerplate provision exists that could possibly anticipate the unique variations that occur among companies. It is advisable to hire a competent attorney to draft or review an existing partnership agreement, particularly if that partnership agreement was not drafted by an attorney initially.
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