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A partnership occurs whenever two or more people co-own a business and share in the profits and losses of the business. While there are other types of legal entities (e.g. corporations, LLCs, etc.) this blog post only addresses partnerships.
In a partnership, each person contributes something to the business. Contributions do not have to necessarily be monetary. A partner can contribute ideas, property, intellectual property, etc. The right to manage the partnership, share in profits, and personal liability will vary depending on what type of business partnership you choose.
A general partnership means an association of two (2) or more persons to carry on as co-owners of a business or other undertaking for profit. General partnerships in Tennessee are governed by the Revised Uniform Partnership Act, T.C.A. 61-1-101 et seq. General partners share equal rights and responsibilities in connection with management of the business, and any individual partner can bind the entire group to a legal obligation. Each individual partner assumes full responsibility for all of the business's debts and obligations. There is a tax advantage in that partnership profits are not taxed to the business, but instead pass through to the partners, who include the gains on their individual tax returns at a lower rate. A general partnership does not require any formal organization, such as filing with the Secretary of State, but a partnership agreement is essential to any business partnership.
A limited partnership is a partnership formed by at least two people, and has at least one general partner, and one limited partner. General partners are liable for the obligations of the partnership, while the liability of limited partners is "limited" to the limited partner's investment in the business. The general partner retains the right to control the business, while the limited partners do not participate in management decisions. Both general and limited partners benefit from business profits.
Limited Liability Partnerships (LLP)
A limited liability partnership may be formed when either a general or limited partnership elects to become an LLP by filing an application with the Tennessee Secretary of State. The management of a LLP is really no different than that of a general partnership or limited partnership. It is always advisable for a LLP to have a partnership agreement that governs its affairs, including the right to receive a share of the profits, sharing in the losses of the business, liability for claims by third parties against the partnership, management duties, contributions to the partnership, withdrawal of a partner, effect of death or divorce on partnership interest, etc. .
The primary advantage of the LLP is that the personal liability of the general partners for obligations and liabilities committed by another partner or employee is limited.
Whatever business entity is selected, it is always important to have an agreement in place that spells out exactly what the rights and obligations of the business partners are regarding the functioning of the business and the share or profits and losses.