63
6
Corporate Form
Myriad Choices
GENERAL PARTNERSHIPS
A general partnership is a voluntary association of two or more individuals for busi-
ness entities who agree to work together for a common business purpose. The part-
ners, who own the business, share their prots or losses equally or as otherwise
provided by agreement. Like proprietorships, partnerships can be formed easily. No
formal steps are required to establish or maintain a partnership. In order to conrm
certain aspects of their relationship, many partners enter into a written partnership
agreement to specify their understanding (a meeting of the minds) on matters such as
how the prots and losses of the business should be allocated, procedures for admis-
sion of new partners (stock purchase/entry documents), and withdrawal of existing
ones (exit arrangements documents).
Partnerships offer business owners “pass-through” tax treatment. The partner-
ship does not pay income tax. Instead, the income, prots, losses, and expenses of
the partnership ow directly through to the partners, who then report their allocable
share of income and expenses on their personal tax returns. Because partnership
income is not taxed at the partnership level, operating a business as a partnership is,
like a proprietorship, attractive from a tax perspective.
diSAdvAntAgeS of generAl pArtnerShipS
Personal liability is the biggest problem with partnerships. In a general partner-
ship, each partner is personally liable for all debts and obligations of the business.
The consequences of this rule in a worst-case scenario could prove disastrous.
If one partner innocently (or negligently) makes a mistake, it could cost all the
partners. The problem is especially signicant because individual partners may be
forced to satisfy the business obligation out of their personal assets if the business
assets are inadequate.
What about when someone leaves the partnership? A big problem with partner-
ships is that they lack business continuity. Without an agreement to the contrary,
whenever an existing partner ceases to be a partner, whether as a result of retire-
ment, death, expulsion, or the like, the partnership ordinarily is deemed to have
been dissolved as a matter of law. Steps could be taken to continue the business,
with or without one of the successors or heirs, if any, but the process is not auto-
matic. If the heirs or successors decide not to continue the business, they could
require a distribution of partnership assets and force a liquidation of the business.
Talk about job security for attorneys and accountants! Given the volatile emotions

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