If you and your business partner run a company in Oklahoma — and you have not registered the business with the state as a limited liability company or corporation — you are operating as a general partnership.
What is a business partnership?
A business partnership is a legal arrangement between two or more people who operate a company together while sharing profits and losses.
From a legal standpoint, Oklahoma law defines a partnership as “an association of two or more persons to carry on as co-owners of a business for profit formed under Section 10 of [the Oklahoma Revised Uniform Partnership Act], predecessor law, or comparable law of another jurisdiction.”
Oklahoma recognizes three types of partnerships:
Forming a general partnership in Oklahoma
A general partnership, like a sole proprietorship, is simple and inexpensive to organize. There are no formal state filing or entity registration requirements. There are no registration fees. And while Gungoll Jackson strongly advises against it, there is no requirement to enter into a written partnership agreement.
Also, like a sole proprietorship, there is no distinction between the partnership (the business) and its owners (the partners). Liability in a general partnership means that all partners are personally liable for all obligations of the partnership.
How to determine if a general partnership exists
Under Oklahoma law, if two or more individuals (or entities) associate and carry on as co-owners of a business for profit — and do not register as another form of entity — they have formed a general partnership, whether they intended to form one or not.
If you have questions about whether or not you’re operating a general partnership, Gungoll Jackson can help you understand the rules that govern the formation of a general partnership.
The following are, by themselves, insufficient to establish a general partnership:
- Joint tenancy or joint property, even if the co-owners of the property share profits made by use of the property
- Sharing gross returns, even if the individuals have a common interest in the property that generated the returns
However, if you receive a share of the profits, Oklahoma law presumes you are a partner unless the payment was for a debt, independent contractor services, wages or compensation, rent, an annuity, retirement or health benefits, interest or other charges on a loan, or the sale of the goodwill of a business or other property.
Advantages of a general partnership
Like every business structure, there are benefits and drawbacks to a general partnership. Benefits include:
- Easy formation. General partnerships do not require any formal filing with the state and there is no requirement to prepare a formal partnership agreement. This makes formation of a general partnership a quick, low-cost option for business owners.
- Pass-through taxation. A general partnership does not pay income taxes. The profits and losses pass through to its partners. Partners report the income, gains, losses, deductions, and credits, etc., on their tax returns.
- Collaboration. Because a general partnership is an association of two or more individuals/entities, it allows the partners to pool their resources, including capital, experience, and skills. This can provide a stronger foundation for the business to build upon.
Disadvantages of a general partnership
- Personal liability. Since there is no distinction between the business and the partners, each partner is personally liable for all debts and obligations of the partnership. This places their personal assets at risk if the partnership faces a lawsuit, bankruptcy, or financial trouble.
- Shared liability for partners’ actions. All partners are liable for the conduct/actions of the others partners when that conduct/action is taken in the ordinary course of business of the partnership or with authority of the partnership. This means a partner can be held liable for the actions of another partner, even if they were not directly involved or did not cause the issue.
- Limited existence. Unlike corporations or limited liability companies, a partnership’s existence is directly tied to the partners. As such, if a partner withdraws from the partnership (and is permitted to do so) or if a partner passes away, the general partnership will, under most circumstances, cease to exist if only one partner remains active in the business.
Forming a limited partnership in Oklahoma
Unlike a general partnership, a limited partnership requires the filing of a Certificate of Limited Partnership with the state of Oklahoma in order to be formed. In a limited partnership, there are two classes of partners:
General partner: Much like partners in a general partnership, a general partner’s liability includes all obligations of the limited partnership.
Limited partner: A person has no liability as limited partner for the obligations of the limited partnership.
While status as a limited partner may seem like the better option, consider the management rights of general partner and the restricted power of a limited partner. While general partner manages the limited partnership, the limited partner has little or no say in the management of the partnership.
Advantages of a limited partnership
Every business structure comes with benefits and drawbacks. Benefits of a limited partnership include:
- Limited liability. Limited partners are not responsible for the obligations of a limited partnership, which may make it easier to attract investors.
- Pass-through taxation. Like general partnerships, a limited partnership is taxed as a pass-through entity. This means, unlike a C corporation, a limited partnership does not pay taxes. Each partner reports their share of income, gains, losses, deductions, credits, etc. on their personal tax returns.
- Passive investment. Because limited partners have little to no say in the management of the limited partnership, they can invest and earn a return without getting involved in the day-to-day operation of the company.
Disadvantages of a limited partnership
- Unlimited liability. General partners, like a general partnership, are personally liable for all of the obligations of the business.
- Limited control. Limited partners have little to no say in the management of the business, which can make difficult to attract investors.
- Complex formation. Forming a limited partnership is more complex than a general partnership. The partners must file a Certificate of Limited Partnership, prepare and execute a partnership agreement, and maintain certain records and business formalities.
Limited liability partnerships
Limited liability partnerships are mainly used by professional service businesses such as law firms, accounting firms, and medical practices. All partners in the limited liability partnership have liability for the obligations of the limited liability partnership. However, their liability is limited to their investment in the partnership.
Gungoll Jackson helps companies form business partnerships in Oklahoma
When you run a company in Oklahoma, it’s important to choose the right legal entity structure for your business. Schedule a meeting with Gungoll Jackson’s corporate and business attorneys to discuss the various types of partnerships, what structure is right for your business, and how we can help you meet your business goals. Contact us today to get started.
