Courts often say that true partners share in three communities of interestoCapitaloManagementoProfitsPartnership ConsiderationsEntity theoryoLiability and company assets
Aggregate TheoryoPass through partnership (tax partners individually)Despite the fact that a written partnership agreement is usually not required, it is highly desirable. Formation of a business is a substantial undertaking and should not be left to the oral declarations of the parties for several reasons:o1) There are many inherent problems in proving the exact terms of an oral agreemento2) Numerous problems (such as those relating to taxation) can be satisfactorily resolved only by a carefully drafted written instrumento3) If the parties go through the process of drafting a formal document with the aidof an attorney, they are much more likely to foresee many problems they otherwise would not have thought about. For example, matters such as procedures for expulsion of a partner or for settlement of disputes between partners are easily overlooked because they seem so remote when the partnership is first formedIs this a partnership?The most important substantive factors in determining the parties’ intent are:o(1) sharing of profits and losseso(2) joint control of the businesso(3) joint ownership and control of capital or property.Sharing of Profits and LossesoIf there has been no sharing of profits or agreement to share them, a court is verylikely to find that no partnership existsoEXCEPTIONSCreditor, Employee, consideration for sale of property, rent, annuityLiabilityGeneral PartnershipoIn a general partnership, each partner is potentially personally liable for the obligations of the partnershipoIf a partnership suffers catastrophic losses because of a bad business deal or a tort committed by a partnership employee, partners might have to dig into their own pockets to satisfy a judgment against the partnership.oThe purchase of insurance is the primary way that general partners can avoid individual liability for partnership losses.CorporationsoThe corporate form provides substantial protection from liability for firm debts andis therefore often a very attractive form of business organization.oA downside of a corporation is that it is often faced with double taxation in that the corporation pays corporate income tax on firm income and then shareholderspay individual income taxes on dividends paid out on that income to the shareholdersLimited PartnershipsoA limited partnership is a partnership that is composed of at least one general partner and at least one limited partner. Typically there are one or a few general partners who actively run the business and many limited partners who are essentially passive investors comparable to shareholders in a public corporation.
Under limited partnership law, limited partners enjoy the limited liability accorded to shareholders of a corporationoThe general partner still retains liability