In my previous post I discussed that the two main characteristics of a General Partnership are unlimited liability and pass-through taxation. But what I didn’t do was explain what they are in detail. I figured, the subject could be painful enough for some to make the post too wordy for you all.
Unlimited liability for partners is mainly that, the partners are liable for the firm’s debt after the firm’s assets are depleted. In other words, if an employee of a partnership suffers damages and sues the partnership, he would be able to go after the partners’ assets after the partnership itself has ran out of its funds. In this case, the employee could proceed to recover the judgment settlement of what’s owed to him from the individual partners themselves.
Pass-through taxation is an element of a General Partnership because partners aggregated together make the entity work and therefore, there is no separate existence of its own similar to that experienced by corporations. Although, the partnership files an informational return, in reality it pays no taxes. The tax burden in this case would be passed on to its individual partners based on their allocated income whether this income is distributed or not.
RUPA however views the partnership separate from its partners (without affecting pass-through taxation) for most purposes. RUPA takes this approach for the partnership to continue to exist even if partners decide to come and go.
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