A general partnership is defined as an association of two or more individuals who carry on as co-owners of a business for profit. All partners in a general partnership are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the creditor. This includes "silent" partners. Each partner is bound by the terms of the written of in some cases oral general partnership agreement. The vote of of a majority of the partners will generally govern the partnership's routine business affairs, unless the partnership agreement contains provisions to the contrary. Typically, each partner has an equal voice in partnership affairs and nay partner may bind the partnership in dealing with third parties. The general partnership is much less flexible than the corporation with respect to methods of raising capital. Funds may be obtained through voluntary or if it is authorized by the partnership agreement through mandatory contributions to partnership capital, loans from partners, and loans from outsiders.
The partnership may also derive capital by increasing its membership. The death or withdrawal of a partner will result in the dissolution of the generall partnership but not necessarily a liquidation of the partnership. The partnership agreement may provide that withdrawal by a partner contrary to the terms of the agreement will give the remaining partners the right to purchase the interest of the withdrawing partner or certain other rights. A partner's interest in the partnership is also subject to a charging order.
In a limited partnership all management functions are vested in the general partners. To maintain their limited liabilty status, the limited partners are prohibited from being involved in the control of the limited partnership. In contrast to a corporation, there are very few governmental formalities and regulations with which a general or limited partnership must comply. Similarly, the limited partnership typically raises capital through contributions by its parties. Because interests in limited partnerships are treated as securities, applicable federal and state securities laws must be complied with when interests in limited partnerships are issued. A limited partner is not liable for the obligations of a limited partnership unless the limited partner is also a general partner or participates in the control of the business.
Partnership may be formed without either the partners or the partnership incurring any tax liability. The general rule under IRC § 721 is that no gain or loss will be recognized by the partnership or any partner when a partner exchanges property for an interest in the partnership. Reciept of a partnership interest for services may be taxable. This general nonrecognition rule applies not only to the formation of the partnership, but also to any later contributions of property to the partnership by its partners, even if the partner is not in control as required in the corporate context. Any amounts paid or incurred to organize a partnership or to promote the sale of interests in the partnership are not deductible by the partnership or to promote the sale of interests in the partnership are not deductible by the partnership or any partner. A general partnership is not a tax paying entity, but rather a tax conduit. IRC § 701 states that a partnership is not subject to federal income taxation and that persons carrying on a business as partners are libale for the income tax in their separate individual capacities. As a result, partnership income is taxed at the individual partners' tax rates. Also, the partners may use partnership losses to offset their income. Under IRC § 704(d), however a partner may only deduct his share of losses to the extent of the adjusted basis in his partnership interest at the end of the partnership year in which the loss occurs. Subject to requirements contained in IRC § 704, general partnerships have the ability to make special allocations of income, gain, loss, deduction, and credit among partners. As a result, it is possible, within limits, to shift income and loses among partners based upon thier individual tax situations. This is a distinct advantage over a corporation, which is limited in its ability to specially allocate income. The tax treatment of a limited partnership is essentially the same as the tax treatment of a general partnership. As a consequence, limited partnerships have historically been the entity of choice for tax shelter syndications because they permit favorable pass-through treatment while giving the passive limited partner investor the benefit of limite liability.