How to Make a Business a Partnership When a Partner Lives in Another State

By Lee Roberts

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.

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.

Agreements

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.

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Types

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.

Considerations

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.

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Importance of Partnership Agreement
 

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Key Sections of a Partnership Agreement

A general partnership is an agreement between two or more people to go into business together. This type of organization is subject to state law and agreements between the owners of the business. In most situations, the partners can decide how they want to operate the business by drafting a partnership agreement, a set of rules governing business operations. If an agreement does not address a particular issue, the laws of the state where the partnership is headquartered will govern how the business is to act in those circumstances. As a result, a partnership agreement can be quite detailed. However, there are some key sections that can be especially important.

Details of a Partnership Agreement

Although state laws do not require partnership agreements, a partnership agreement can provide a solid legal foundation for your business venture. Even among family and friends, a partnership agreement can provide benefits in the form of clarifying rights, relationships, and responsibilities related to the business venture. Without a partnership agreement, unnecessary disputes will certainly arise as the business operates over time. Friends may turn into enemies over issues that were supposedly decided in a handshake agreement, but were never spelled out in writing. The details of a partnership agreement help avoid conflict by establishing all the important aspects of the business in a written document to which all partners agree.

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