CHART: Partnerships vs. Corporations
Partnership/Sole Proprietorship
Corporations
Advantages of Partnerships
Not treated as separate entities from the individuals forming the partnership
A new legal entity is created
Informal – no govt. filings or payment of taxes needs to occur
Formal – filing of charter, payment of filing fees, naming of board, filing articles of incorporation must occur prior to creation
Decision making occurs by the partners – no board of directors: Each general partner is an agent of the partnership
Centralized Management: decision making is performed by a Board of Directors and by officers – limited powers remain with the s/holders, however. S/Holders cannot act on behalf of the corp.
Personal Liability is incurred by the partners for debts and liabilities of the partnership
Limited Liability of S/holders
Flow Through Taxation – individuals pay taxes, not the entity
Corporations must pay separate taxes from the taxes that each s/holder pays
Partnerships don’t have to pay many fees
Corporations have many fees to pay for incorporation etc
Disadvantages of Partnerships
Partnerships have limited life – they only exist as a group of people – if someone leaves the partnership, it dissolves (default rule) (disadvantage)
Corporations have perpetual life unless dissolved actively (advantage)
Limited transferability (default rule) (disadvantage)
Easy to transfer stock (advantage)
Partnerships
Big Question of the Class
A. Choice of Entity: Partnerships v. Corporations
Limited Partnerships
A. These are becoming less and less common with each passing day.
B. Limited Partners may contribute capital, they share in profits and losses, but the limited partner is not personally liable for the obligations of the limited partnership.
1. LPs invest money (silent partners), but don’t make decisions for the partnership. As long as they don’t participate in the business, their liability is limited – no liability for partnership obligations.
2. Limited Partnerships include general partners & limited partners.
C. Advantages
1. LPs are required to stay quiet – locks them into their passive role
D. Disadvantages
1. LPs lose their privilege easily – very fragile
General Partnership
A. Written Agreements
1. Not necessary, but recommended (partnership agreements are contracts)
2. Advantages:
a. Written Agreements allow for clear understanding of the terms and there is less room for misunderst
anges:
a. C need not join B b/c it is joint and several liability for contract claims as well.
b. C MUST go after the partnership assets to fulfill his claim before suing A or B personally.
C. Liabilities
1. You can’t contract around liabilities to 3rd parties
a. 3rd parties can sue partners directly for partnership liabilities
i. UPA14
a. Contract liabilities: joint liability
b. Tort liabilities: joint & several liability
ii. UPA97
a. All liabilities: joint & several liability
1. Indemnification right exists.
2. If the partnership is insolvent, the partners can force dissolution and require contribution from other partners.
b. Must go after partnership first & exhaust its assets before going after the partners’ personal assets.
2. Defendants who left before the breach who didn’t sign the original lease are not liable as only in privity of estate during their time with the partnership. Need privity of contract.
3. You are liable as a partner for any liability that arises from activity while you were a partner, even if the loss arising from that activity comes much later. (absent some other agreement) (8020 Maryland)
a. Implications: This could be a trap for a partner that executes a long-term lease, even if he leaves shortly thereafter.
i. Possible alternatives
a. Short-term leases
b. Securing an indemnification from other partners upon his withdrawal.
