When a sole proprietor takes on a partner or secures an investment from another person or persons who will share in the profits of the business, or when two or more persons team up to create and carry on a business and share the profits as co-owners, a partnership has been formed.
No registration with the state is required to form a partnership. While a written partnership agreement is not required, such an agreement is customary and recommended. In addition, if a partnership is doing business under a name other than the owners’ true names, a fictitious name filing must be made with the Secretary of State and renewed every five years.
A partnership agreement will often detail the delegation of management duties among the partners and the plan for allocation and distribution of business income to the partners. It might also address restrictions on transfer of ownership interests in the partnership and what happens upon the death or withdrawal of a partner. If the partners in a partnership do not reach another agreement or differ as to the agreement which was reached, state law provides that partners have equal authority in the partnership management, and that they also have equal financial interests – even if they contribute different amounts to the partnership. The
Unlike a sole proprietorship, the partners in a partnership are no longer solely liable for the responsibilities and liabilities of the business. Instead, each of the partners shares total responsibility and liability for the debts and obligations of the partnership. Each partner is an agent of the partnership and can bind the partnership to many obligations, and thus can create a wide range of liabilities. Each partner’s liability includes total personal liability for the wrongful acts or omissions of the other partner(s).
So even though a partnership allows the sharing of duties and pooling of the talents of each partner, it also creates broader liability exposure for each co-owner. Partnership liability is “joint and several,” a legal term which means that each partner has the duty to fully perform the entire obligation of the partnership. It also means that each partner may be sued and the entire judgment can be collected from one partner even if responsibility or fault for the obligation falls on the business itself or among the several partners.
While unlimited liability is the most material disadvantage of the partnership form, the flow-through taxation characteristic is the most advantageous. Similar to a sole proprietorship, and unlike a corporation that has not elected Subchapter-S status, the partnership itself does not pay taxes. Instead, the individual partners are taxed on their income from the partnership. The partners may divide and allocate the income from the business among themselves in a variety of manners. The partnership form does allow the partners or initial principals to raise capital by selling interests in the partnership, though they do have to convince their investors that the general liability of a partner is worth the risk.
Though partnerships and sole proprietorships are common business forms in Missouri, many entrepreneurs and business people elect to form a statutory entity to take advantage of liability protection, tax benefits and generally recognized corporate structures, and so that they may raise capital in a traditional manner. Choosing among the variety of statutory entities available requires careful consideration. The advice and counsel of an attorney, accountant and other professionals is highly recommended.