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Business Formation - Partnerships

Partnerships are popular business structure for professionals and for asset protection purposes. Partnerships are unique because there are different types of partnerships, each having its own advantages and disadvantages. It is always recommended that you speak with an experienced business attorney before setting up the legal structure for your partnership.

General Partnerships:

(1) General partnerships are governed by Maryland's Revised Uniform Partnership Act. No written agreement or filing with the state is necessary to establish this type of business organization. This is what I like to refer to as the "accidental partnership" because many times individuals discover that they are in a partnership without realizing it. All that is required for a general partnership is that two individuals carry on a business activity with the intention of earning a profit.

(2) Maryland's Revised Uniform Partnership Act provides for the business structure of the partnership unless otherwise provided in a partnership agreement. Even if you decide on using a general partnership for your business structure, a partnership agreement would still be beneficial in determining the formation, operation and dissolution of the partnership.

(3) General partnerships create unique liability for both the partnership and the individual partners. Outside of very narrow and limited situations, the actions of each partner may bind the general partnership to an agreement or legal liability.

Limited Liability Partnerships:

(1) An existing general partnership may convert itself to a limited liability partnership, which would afford more legal protections than a general partnership.

(2) Generally, partners of a limited liability partnership may not be personally liable for any debts or obligations of the limited liability partnership that are incurred by the partnership. In other words, a limited liability partnership is essentially a partnership with enhanced personal liability protections.

Limited Partnerships:

(1) Limited partnerships are partnerships are unique because they have both general partners and limited partners. General partners manage the partnership and are personally liable for all of the debts of the partnership. Limited partners are limited in their control of the partnership, but retain their limited liability to the partnership. When structuring a limited partnership it is imperative to properly draft the partnership agreement to provide for proper personal liability protections and partnership management roles.

(2) Limited partnerships are common for investment ventures among multiple individuals.

Common Partnership Mistakes:

(1) Undocumented partnerships. General partnerships can be created without formal documentation, potentially epxosing partners and the partnership to unnecessary liability. It is important to formally establish your partnership to protect both the partners and the partnership from the start of the partnership.

(2) Many business owners fail to properly file the partnership's personal property tax return. This can result in the forfeiture of the business entity and possible personal liability exposure to the business owner.

(3) Using non-attorney online vendors to create a partnership. Most online vendors simply input the text you type into a form that is freely available from the Maryland State Department of Assessments and Taxation to create your partnership. While this will meet the bare minimum required to establish a partnership, the business owners are often missing out on extra protections afforded to them under Maryland law.

(4) Unnecessarily paying for resident agent fees. Every business entity, including limited partnerships and limited liability parterships, are required to have a resident agent . While you are required to have a resident agent for your partnership, you may act as your own resident agent. As long as you are comfortable receiving legal documents on behalf of your limited liability company, you should seriously consider acting as your own resident agent. In addition, acting as your own resident agent does not invalidate any of the personal liability protections afforded to you by your partnership.

The Proy Law Firm can help you decide if a partnership is the right choice for your business:

Contact us as any time if you are thinking about establishing or revising your partnership. It is important to start your new business off with the right type of business entity and the proper documentation in place.