You are here

Importance of Partnership Law

19 January, 2016 - 16:39

It would be difficult to conceive of a complex society that did not operate its businesses through organizations. In this chapter we study partnerships, limited partnerships, and limited liability companies, and we touch on joint ventures and business trusts.

When two or more people form their own business or professional practice, they usually consider becoming partners. Partnership law defines a partnership as “the association of two or more persons to carry on as co-owners a business for profit…whether or not the persons intend to form a partnership.” 1 In 2011, there were more than three million business firms in the United States as partnerships (see Table 22.1 , showing data to 2006), and partnerships are a common form of organization among accountants, lawyers, doctors, and other professionals. When we use the word partnership, we are referring to the general business partnership. There are also limited partnerships and limited liability partnerships, which are discussed in Hybrid Business Forms .

Table 22.1 Selected Data: Number of US Partnerships, Limited Partnerships, and Limited Liability Companies
  2003 2004 2005 2006

Total number of active partnerships

2,375,375

2,546,877

2,763,625

2,947,116

Number of partners

14,108,458

15,556,553

16,211,908

16,727,803

Number of limited partnerships

378,921

402,238

413,712

432,550

Number of partners

6,262,103

7,023,921

6,946,986

6,738,737

Number of limited liability companies

1,091,502

1,270,236

1,465,223

1,630,161

Number of partners

4,226,099

4,949,808

5,640,146

6,361,958

 

Source: IRS, http://www.irs.gov/pub/irs-soi/09sprbul.pdf.

Partnerships are also popular as investment vehicles. Partnership law and tax law permit an investor to put capital into a limited partnership and realize tax benefits without liability for the acts of the general partners.

Even if you do not plan to work within a partnership, it can be important to understand the law that governs it. Why? Because it is possible to become someone’s partner without intending to or even realizing that a partnership has been created. Knowledge of the law can help you avoid partnership liability.