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Partnerships, originally governed by common law, are today governed by state law, either the Uniform Partnership Act of 1914 (1) or the Revised Uniform Partnership Act.(2) A partnership is simply an association of two or more persons as co-owners conducting a business for profit. Partners have a relationship of mutual agency of a fiduciary nature, with each partner having the authority to bind the partnership. Partners can be either individuals or legal persons.

General Partnerships
A general partnership is a partnership in which all partners are general partners. General partners have an equal voice in the management of the partnership, equal shares in the profits and losses in the partnership (unless there is an agreement otherwise), rights in the specific property held by the partnership as well as joint and several unlimited liability. Joint and several unlimited liability means that a creditor can sue any one of the partners for the entire sum of any debt or claim, and that partner is liable to pay for the entire sum. The partner then has a right of regress against the other partners for their portion of the amount.

All partners have equal rights in the management and conduct of the partnership business. The majority may act in the event of a disagreement. However, unanimity is required to change the partnership agreement. The partners are free to delegate the management of the partnership. This is in contrast to a corporation in which the structure for corporate governance is mandated by law. The partnership must indemnify each partner with respect to payments made and personal liabilities reasonably incurred in the ordinary and proper course of the partnership business, or in the preservation of the partnership business or property.

As the partnership relationship is a fiduciary relationship, the partners have certain duties towards each other, including duties of care, loyalty, to disclose certain information and to account and keep books. Partners have a right to a share of the profits. However, partners do not necessarily have a right for compensation for time spent acting on behalf of the partnership unless agreed upon.

The dissolution of a partnership can be voluntary. Dissolution can also be triggered by the death, insanity, disability or bankruptcy of a partner, or the expulsion of a partner from the partnership, illegality, or violation of the partnership agreement. Dissolution is the point in time when the partners cease to carry on the business together. Winding up is the period after the dissolution in which the process of settling the partnership affairs takes place. Termination is the point in time when all the partnership affairs have been wound up and all the assets distributed.

Limited Partnership
A limited partnership (3) is a partnership formed by two or more persons, one general partner and at least one limited partner, created in accordance with a limited partnership statute.(4) The general partner’s rights and obligations are those as described above. The status of the limited partners however differs, providing an incentive for investment while creating a shield against the joint and several unlimited liability existing in general partnerships. The liability of the limited partners is generally limited to their financial contributions to the partnership. Limited partners are not allowed to participate in the control of the business. If they are found to be controlling the limited partnership, they lose their status as limited partners. RUPA allows a limited partner to contribute services, but only to a limited extent. RUPA also has explicit provisions that permit the conversion of a general partnership into a limited partnership, and the reverse, as well as mergers between partnerships.

Limited Liability Partnerships
A more recent partnership form is the limited liability partnership as added to RUPA in 1996. This business form allows professional firms or other businesses to continue to operate as an ordinary partnership. The difference is that the partners enjoy limited liability. Certain states have restricted this limited liability to only tort claims and not contractual obligations. A statement of qualification has to be filed with the state upon formation of a limited liability partnership.

Limited Liability Companies
British English uses the term limited liability company for that which in American English is referred to as a corporation. However, limited liability companies do exist as a distinct legal entity in some states in the United States.(5) A limited liability company is a hybrid between limited partnerships and corporations. It is treated as a partnership for federal income tax purposes (the owners are taxed, not the entity), but in contrast to a limited partnership, all of the owners enjoy limited liability regardless of their participation in control. This business hybrid reflects the desires of certain states to offer more attractive or flexible business alternatives in the competition between states to attract business. This competition between states to attract business through legislative and tax advantages is comparable to the similar competition within the European Union between the member states.

Excerpted with permission of the author from: American Business Law A Civil Law Perspective, Laura Carlson, J.D. (USA), LL.M. (Sweden)

(1) The Uniform Partnership Act (“UPA”)(1914) was adopted in 49 states and in the District of Columbia.
(2) The Revised Uniform Partnership Act (“RUPA”)(1994) has been adopted by three states. RUPA with the 1997 amendments (providing for limited liability for partners in a limited liability partnership) has been adopted in 30 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico as of 2005. See generally http://www.nccusl.org. According to UPA § 4, issues not covered by the act are to be governed by the rules of law and equity.
(3) General partnerships are derived from the law merchant from the continental sociétés and limited partnerships from the société en commandite. Henn at 62 and Franklin A. Gevurtz, Corporation Law 3 (West Group 2000).
(4) The Uniform Limited Partnership Act of 1916 and the 1976 version was adopted by 49 states and the District of Columbia. A new version was drafted in 2001 that as of 2005 had been adopted by Hawaii, Illinois, Iowa, Minnesota and North Dakota.
(5) Wyoming was the first state to enact legislation regarding limited liability companies in 1977. A uniform draft proposal was issued in 1995 and amended in 1996 by NCCUSL. As of 2005, Alabama, Hawaii, Illinois, Montana, South Carolina, South Dakota, the U.S. Virgin Islands and West Virginia have adopted it. See http://www.nccusl.org/Update/uniformact_factsheets/uniformacts-fs-ullca.asp.