Forming A Partnership
There are two types of partnerships: general partnerships and limited partnerships. We’ll look at forming a general partnership in this post, and a limited partnership in the next. Both general and limited partnerships can elect certain legal rules that give partners in these partnerships greater protection against personal liability. A general partnership that makes this election is called a “limited liability partnership”; a limited partnership that makes this election is called a “limited liability limited partnership.”
A general partnership that is formed in a state other than Minnesota, or in a foreign country, is called a foreign general partnership. A limited partnership that is formed in a state other than Minnesota, or in a foreign country, is called a foreign limited partnership and is subject to additional regulatory requirements. A limited liability partnership (or limited liability limited partnership) formed in a state other than Minnesota, or in a foreign country, is called a foreign limited liability partnership (or foreign limited liability limited partnership) and is subject to additional regulatory requirements.
A general partnership is a business that is owned by two or more persons who associate to carry on the business of the partnership for profit. General partnerships have specific attributes, which are defined by Minnesota Statutes Chapter 323A. The general rule is that in a general partnership all partners share equally in the right, and responsibility, to manage the business, and each partner is responsible for all the debts and obligations of the business. General partnerships that have elected limited liability partnership status operate much like general partnerships, but generally partners in limited liability partnerships are not personally liable for the wrongful acts of other partners or for the debts or obligations of the partnership.
From a regulatory standpoint, a partnership must obtain business licenses if necessary, obtain federal and state tax identification numbers and an unemployment insurance employer account number and will need to register the business name as an assumed name, unless the first and last name of each partner is included in the name of the partnership. Note that, as explained below, it is also strongly recommended that the partnership (no matter what type) draw up a written agreement addressing key issues like the allocation of management responsibilities, the distribution of profits and losses, and rights upon termination. The partnership agreement is not filed with the state, however. Issues commonly addressed in a partnership agreement are discussed in the next section.
A list of business licenses required by the state of Minnesota appears in the section of this Guide titled Directory of Licenses and Permits. Procedures for registering the business name as an assumed name are discussed in the previous section of this Guide.
Note that any partner of a general partnership that has elected limited liability partnership status, or professional limited liability partnership status, is jointly and severally liable for contributions or reimbursement, including interest, penalties and costs with respect to unemployment insurance benefits if the partnership, as an employer, does not pay any amounts with respect to unemployment insurance benefits due to the Minnesota Unemployment Insurance Program.
Although the partnership itself is not a taxable entity, it must file an annual federal and state “information” return with the Internal Revenue Service and the Minnesota Department of Revenue. For this reason, both federal and state tax identification numbers must be obtained by the partnership. A partnership that will be selling a product or service that is subject to sales tax also will need to register for purposes of Minnesota sales and use tax. A partnership that will hire employees, even if those employees are members of a partner’s family, must secure workers’ compensation insurance covering employees. These taxes and procedures for obtaining tax numbers are discussed in the section of this Guide on business taxes.
Partnerships that will be hiring employees also should review the section of this Guide on issues for employers.
Registration of Domestic and Foreign Limited Liability Partnerships
In order to become a limited liability partnership, a Minnesota general partnership must file a registration to that effect. A form that includes the specifically required language is available from the Secretary of State website at www.sos.state.mn.us/index.aspx?page=331 , or by fax from the Fax Forms library at (651) 296-2803, or by mail from the office. The partnership is subject to limited liability partnership rules of law on and after the date the registration is filed. That registration is valid indefinitely as long as the annual registration for the partnership is filed on a calendar year basis.
Non-Minnesota limited liability partnerships must similarly register with the Secretary of State and must attach to the registration a certificate of good standing or status from the state or province where the foreign limited liability partnership is formed.
The Partnership Agreement
The partnership agreement addresses a number of issues relating to the management and operation of the partnership. In drawing up the partnership agreement, the prospective partners should consult with legal counsel to assure that the needs and desires of the partners and relevant legal issues are addressed. Some of the issues typically addressed in a partnership agreement include:
- Name of the partnership.Duration of the partnership.
- Location of its place of business.
- Capital contribution of each partner.
- Whether partners may make additional contributions.
- The level at which capital accounts of the partners must be maintained.
- Participation of each partner in profits and losses.
- The amounts of any regular drawings against profits
- Responsibilities and authority of each partner.
- Amount of time to be contributed by each partner.
- Prohibition of partner’s outside business activities which would compete with the partnership business.
- Name of the managing partner and method for resolving management disputes.
- Procedure for admitting new partners.
- Method of determining the value of goodwill in the business, in case of death, incompetence, or withdrawal of a partner or dissolution of the partnership for any other reason.
- Method of liquidating the interest of a deceased or retiring partner.
- Circumstances under which a partner must withdraw from active participation, and arrangements for adjusting the partner’s salary and equity.
- Whether or not surviving partners have the right to continue using the name of a deceased partner in the partnership name.
- Basis for expulsion of a partner, method of notification of expulsion, and the disposition of any losses that arise from the delinquency of such a partner.
- Period of time in which retiring or withdrawing partners may not engage in a competing business.
- Procedures for handling the protracted disability of a partner.
- How partnership accounts are to be kept.
- The fiscal year of the partnership.
- Whether or not interest is to be paid on the debit and credit balances in the partners’ accounts.
- Where the partnership cash is to be deposited and who may sign checks.
- Under what conditions limited partners may be accepted into the firm, and, if so, who shall be designated as the general partner.
- Prohibition of the partners’ pledging, selling, hypothecating, or in any manner transferring their interest in the partnership except to other partners.
- Identification of material contracts or agreements affecting the liability or operation of the partnership.