Partnership Law

§1. Introduction

This is a type of business entity that is still very common in the US. There are two million of partnerships in the United States. They generate 2 and a half trilliard dollars. One of the consequences of a partnership is that all of the partners are personally liable for the debts and obligations of the partnership. All of the partner’s personal assets are exposed to potential recovery for debts against the partnership. For that liability, it doesn’t matter that the partner personally acts in the act that causes the obligation or signs the contract. It is another example of vicarious liability. If you are a partner, you are giving a guarantee to anybody who deals with the partnerships that you will be liable. If you are a partner, you give a personal guarantee. That is a huge risk. On the other hand in a corporation, owners of the corporation, the shareholders are protected by limitative liability shield.

The liability is limited to the amount of the participation.
Given that difference, why will anybody become a partner then? Three reasons:

Partnerships have tax advantages:

A corporation is a taxable entity, which means that a corporation pays taxes in its own name. As a consequence, corporate profits are subject to double taxation: they are taxed when the corporation reports them as incomes and when they are distributed to shareholders. This is significant if we are talking about a small business. Traditionally one way to avoid this is a partnership because a partnership is not a taxable entity: it is a pass-through entity. The income is not taxed at the level of the partnerships. The partner will pay tax on that income. The partnership has to file a tax return (return = declaration of income) but only for information purpose (to inform the Internal Revenue Service). All they have to show to the IRS (Internal Revenue Service) is how much income the partnership earned and how it is divided between the