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A partnership is an association of two or more persons to carry on as co-owners a business for profit. Although recommended, a written partnership agreement is not required to form a partnership. For business law purposes as well as under federal and state income tax law, a partnership is a legal entity separate and apart from its owners. There are three types of partnerships: general partnerships, limited liability partnerships, and limited partnerships.
A general partnership does not provide any liability protection for its owner/partners. Each owner/partner is jointly and severally liable (that is each partner is individually liable to third parties for the entire liability of the partnership) to the extent of his or her personal assets for any liabilities of the partnership which cannot be satisfied by the assets of the partnership.
General partnerships exist under the law until there is only one remaining owner or until one or more of the partners has left the partnership, and the partnership and its partners do not elect to continue the partnership business.
A partnership interest may be transferred, but in the absence of agreement by the remaining partners, the transferee acquires only the right to receive the share of profits, losses and distributions allocated to the transferred interest and may not participate in management, bind the partnership by his actions or have access to partnership information, books and records. The transferor retains the rights not transferred.
A partnership may sue or be sued, buy, lease or sell property, sell and trade stocks and the like in its own name. Each of the partners of a general partnership has the authority as an agent of the firm to bind the firm and all the other partners in contracts with third parties that are in the ordinary course of the partnership's business.
A general partnership must file federal and state income tax returns; however, it pays no federal or state income tax. The tax returns filed by a partnership are information returns. The income and losses generated by a partnership are distributed or deemed to have been distributed to the partners in accordance with the terms of the partnership agreement, which generally will provide for a distribution of profits and losses in accordance with the percentage of ownership interest of each owner/partner. Partners receive a form K-1 that contains information that they include on their individual Form 1040 returns.
Limited Liability Partnership
Under general partnership law, each partner is jointly and severally liable for the actions of his or her partners, even if they had no involvement or even knowledge of the action. Nebraska has adopted the Uniform Partnership Act of 1998, which permits any firm operating as a general or limited partnership in Nebraska to register as a "Limited Liability Partnership" (LLP) simply by electing to do so and filing a certificate with the Secretary of State.
The LLP format provides liability protection to individual partners in a partnership against liabilities, including tort lawsuits arising out of the activities of other partners, employees or agents of the partnership, as well as liabilities arising from contract claims. Notice, however, there is no change in the law with respect to an individual's responsibility for his or her own acts or omissions, including his or her own negligence in appointing, supervising or cooperating with another partner, employee or agent of the partnership.
It is important to note that liability protection is available only for that period of time during which the partnership actually exists as an LLP. Reorganizing as an LLP will not expunge a partner's liability for claims (in tort or in contract) which arise out of occurrences prior to the time that the entity becomes an LLP. Furthermore, nothing contained in the LLP statute expunges any liability of the partnership itself, so that all of the assets of the partnership remain subject to whatever liabilities may arise.
Taxation of a limited liability partnership is the same as any general partnership as described in the discussion above. Caution is advised, however, in converting from general partnership to limited liability partnership, since there may be significant tax consequences. If a partner is relieved of personal liability for partnership debts, it affects his basis in the partnership and may result in income tax liability if he is relieved of liability in excess of his basis in the partnership. The key tax issue is whether or not there will be any gain or loss recognized upon the "conversion" from a partnership to an LLP ‑ that is, whether the original partnership will be treated as terminated and a new partnership formed for tax purposes.
A limited liability partnership is created in the State of Nebraska by filing a Certificate of Limited Liability Partnership with the Secretary of State. The name of the LLP must contain the words "Limited Liability Partnership" or either the abbreviation "L.L.P.” or "LLP."
There are no limitations on purposes within the statute, except for the qualification that with respect to professional LLP's, the agency or entity which licenses that profession can place restrictions upon use of the LLP by its licensees.
Nebraska has adopted the Uniform Limited Partnership Act. Like the Limited Liability Partnership, in order to form a limited partnership, it is essential to file papers with the Secretary of State. In the case of a limited partnership, a Certificate of Limited Partnership must be filed. The name of a limited partnership must bear the designation "limited partnership" or an abbreviation such as Ltd. or L.P..
While a limited liability partnership is composed of all general partners, a limited partnership has at least one general partner plus other partners who are referred to as limited partners. The general partner (which may itself be an individual or a corporation or other entity with limited liability) remains generally liable for all of the obligations of the partnership. Limited partners, however, are shielded from personal liability except to the extent of their investment in the partnership. Like shareholders in a corporation, limited partners have limited liability.
As in a general partnership, the general partners of a limited partnership have authority as agents of the firm to bind the company and any other general partner in contract with third parties that are in the ordinary course of the partnership's business. Limited partners, however, do not have inherent authority to bind the firm as agents in their capacity as such although they may bind the partnership if they are otherwise held out as agents.
A limited partnership is taxed under the same rules as a general partnership. In other words, a limited partnership files only an information return and itself pays no federal or state income tax. The income or loss generated by a limited partnership is distributed or deemed to be distributed to the general partner and limited partners in accordance with the terms of the limited partnership agreement, and the partners receive a K-1 form that contains information that they include on their individual Form 1040 returns.
Limited partnerships have a longer duration than that of general partnerships. A limited partnership dissolves and is wound up upon the occurrence of certain events stated in the partnership agreement, which may be a specific termination date, a consent to dissolution by all partners, a decree of judicial dissolution, or an event of withdrawal of a general partner, unless certain provisions are met. These termination provisions are more restrictive than those of a general partnership.
With the recent availability of the limited liability company format, use of the limited partnership form has generally declined. However, the family limited partnership may still be the vehicle of choice for certain estate planning situations.