Partnerships typically afford good opportunities for people to combine their ideas, skills and finances to generate a profit. Living in different states complicates the partnership process because state law controls the formation, organization and dissolution of partnerships. State boundaries are not an insurmountable barrier, but when you cross them to form a partnership, prudence dictates that you take certain steps, including consulting with a tax professional with expertise in multistate partnerships, to ensure success.
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Choice of Law
You and your partner must decide which state’s laws will control your partnership. Partnership law across the United States is similar from state to state because these entities are typically a variation of the Uniform Partnership Act (UPA). Except for Louisiana, every state and the District of Columbia has adopted either the 1914 or the 1997 version of the UPA. In 1914, the goal was for all states to adopt the Act so that laws would be uniform; in 1997, the drafters took into account that there would be differences and linked the default governing law to the state where the partnership has its principal office or manages the bulk of its business.
You do not need a formal written agreement to form a partnership. Under the UPA, two or more persons form a partnership when they carry on as co-owners of a business for profit. Partners create greater certainty among themselves by entering into a written agreement that sets forth the governing rules for the partnership. Courts will look to the relevant state law, as well as the partnership agreement, to resolve disputes. If the state law that the partners choose favors one partner more than the others, the partnership agreement gives them some leeway to create a more equitable environment.
General, limited and limited liability are the three basic partnership types. Limited and limited liability partnerships offer the greatest protections for multistate partners because they reduce the personal liabilities to which they would be subject due to acts of other partners. States require partnerships to register to become limited or limited liability partnerships. Registration includes having an office or agent in the state and providing public notice of your intent to limit your liability, among other requirements. Most states restrict limited liability partnerships to encompass only professional partnerships, such as lawyers, doctors and accountants.
Operating across state lines often means that it is inconvenient for the partners to meet in person or to access partnership property. Partners should include in their written agreement, as part of their standard operating procedures, how they will communicate, including acceptable times and methods to contact one another. If one partner has physical control over partnership property, he should provide for a means to account for the property.