Forming a Partnership

When two or more persons decide to organize a business for profit, they must select the type of organization under which they will operate. One such organization is a general partnership. A general partnership is an association of two or more persons who carry on a business for profit as co-owners. In Pennsylvania, partnerships are governed by a statute known as the Uniform Partnership Act. Although the act establishes the rules that govern a partnership, it permits partners to modify many of those rules by separate agreement.

In a general partnership, all partners are entitled to participate in management and all partners are entitled to share in profits and losses. There are many other rules in the Uniform Partnership Act that may result in an outcome that the partners may not want, including potentially unlimited liability for acts of other partners. Fortunately, the Act allows the partners to modify these default rules through a "partnership agreement." The rules of the partnership, and the specific rights of each partner, including participating in management and sharing in profits and losses, should be clearly agreed upon by the parties before starting operations. These matters should be documented in a written partnership agreement.

A major consequence of the general partnership form of organization is the element of unlimited liability. If the assets of a partnership are insufficient to pay the partnership's creditors, then each partner becomes personally liable to pay the entire deficiency. This outcome is different than a corporation or limited liability entity, where each owner may be able to limit his or her liability to the amount of their investment.

In order to form a general partnership, there are generally no filing requirements with governmental agencies which need to be satisfied. However, if the partnership will conduct business under a fictitious name, a fictitious name registration must be filed in Harrisburg and advertised locally. 

One alternative to the general partnership is a limited partnership. A limited partnership is formed by one or more general partners and one or more limited partners. A limited partnership combines the tax benefits of a sole proprietorship with some of the limited liability protections of a corporation. While limited partners enjoy some form of limited liability, general partners are treated the same as they would be in a general partnership. A limited partnership is formed by filing a Certificate of Limited Partnership with the Department of State, which is prepared by your attorney.

Although there is no legal requirement to do so, the partners should adopt a written partnership agreement prepared by an attorney before the partnership begins business. The partnership agreement will set forth the rights and obligations of the partners. Some of the issues which are addressed in a partnership agreement include: the current and future contributions which will be required of each partner, the allocation of profits and losses among partners, the restriction on transferability of an interest in the partnership, the limitation imposed on each partner's right to manage the business and make decisions, the events causing termination of the partnership such as the death or withdrawal of a partner, and the amount payable to a partner upon redemption of his or her interest in the partnership.  4/11

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