These descriptions are general, and will vary based on state law.
There are two different types of partnership:
General Partnership
A general partnership is an unincorporated business organization in which two or more partners own and manage a business. Each general partner is personally and fully liable for all debts and actions of the business, and shares equal responsibility for the company's profits, losses, debts, and liabilities.
While a general partnership is not subject to a federal income tax, the partnership must report business activities to the IRS using Form 1065, U.S. Return of Partnership Income. A partnership’s net profit or loss is allocated to the partners according to the partnership profit sharing agreement. Each partner receives an IRS Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., that reports their share of the net profit or loss generated by the business as well any other activity that has a tax consequence. Each partner transfers the information on the Schedule K-1 form to their personal tax return and is taxed at their respective personal rate.
The duration or life of a general partnership is often limited. A partnership agreement, which is required in most states, will also specify the limitations on the life of the partnership, who can obligate the partnership, and how profits or losses will be shared. Plans for succession or dissolution of the partnership are usually described in the written partnership agreement.
Documentation
Documentation for a general partnership includes:
- Written partnership agreement
- Buy sell agreement
- Partnership authority to borrow (borrowing resolution)
Signature blocks should be styled consistent with the names, titles, and authorities established in the Authority to Borrow document, which is commonly referred to as the Partnership Borrowing Resolution.
Limited Partnership
A limited partnership is a special type of partnership that has both general and limited partners. A general partner manages the partnership and is responsible for all business decisions. The general partner is liable for all debts and obligation of the partnership. While a general partner may be an individual, the exposure to unlimited liability may result in the general partner being a “separate entity” other than an individual. A credit union should identify and understand the ownership and control of the entity that is acting as general partner. If appropriate, the principals of the entity acting as general partner should provide their personal guarantees, especially if the individual(s) can exercise control over the borrower. An individual can gain control of the partnership when the individual has control of the voting rights of the entity acting as general partner.
Limited partners are excluded from the decision-making process and are not directly involved in managing the business. They are liable only to the extent of their investment in the limited partnership. A limited partner that engages in the management of the business may lose the benefit of limited liability protection.
The profits or losses of a limited partnership are distributed as defined by the partnership agreement, and are taxed at the individual partners’ personal tax rates. While a limited partnership is not subject to a federal income tax, the partnership must report business activities to the IRS using Form 1065, U.S. Return of Partnership Income. A partnership’s net profit or loss is allocated to the partners according to the partnership profit sharing agreement. Each partner receives an IRS Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., that reports their share of the net profit or loss generated by the business as well any other activity that has a tax consequence. Each partner transfers the information on the Schedule K-1 form to their personal tax return and is taxed at their respective personal rate.
The duration or life of a limited partnership is generally limited. A partnership agreement, which is required in most states, will specify the limitations on the life of the partnership, who can obligate the partnership, and how profits or losses will be shared. Plans for succession or dissolution of the partnership are described in the written partnership agreement.
Documentation
Documentation for a limited partnership includes:
- Written partnership agreement
- Buy sell agreement
- Partnership authority to borrow (borrowing resolution)
Signature blocks should be styled consistent with the names, titles, and authorities established in the Authority to Borrow document or also known as a Partnership Borrowing Resolution.
Last updated November 25, 2016
