Forming Partnerships in Arizona and Business Entity Considerations

A partnership is an association of two or more persons to carry on, as co-owners, a business for profit, whether or not the per­sons intended to form a partnership.

A partnership is an entity distinct from its partners. It may conduct business in Arizona under a fictitious name, subject to the requirement that it file a fictitious name certificate. A partnership may sue and be sued in the name of the partnership. In these respects, a partnership is similar to a corporation or a limited liability company.

Under Arizona law, there are different types of partner­ships. This article deals with general partnerships. Limited partnerships, limited liability partnerships, limited foreign lia­bility partnerships, and professional limited liability partner­ships, while all partnerships, too, are outside the scope of this article.

Unlike other forms of business entities (e.g., corporations and limited liability companies), there is no requirement that a partnership file any organizational documents with the state of Arizona. A partnership may literally be formed with a handshake. A better practice, however, is to have a written partnership agreement. A partnership agreement is an agree­ment among the partners concerning the partnership. It may be written, oral, or implied.

The place from which the main part of the partnership’s business is managed is called the “chief executive office.” It may be the home of one of the partners, or a more traditional business office. A partnership is required to keep its books and records at its chief executive office. It is also required to provide partners and their agents access to its books and records.

Each partner has equal rights in the management and conduct of the partnership business. A difference arising as to a matter in the ordinary course of business will be decided by a majority of the partners. An act outside the ordinary course of business may be undertaken only with the consent of all of the partners.

The partners owe one another the duty of loyalty, the duty of care, and the obligation of good faith and fair dealing. Each partner and the partnership must generally furnish to a partner all important information concerning the partnership’s business and affairs. A partner’s failure to disclose this infor­mation constitutes a breach of his fiduciary duty.

Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to his share of the profits. For tax purposes, partners are considered to be self-employed. A partner’s dis­tributive share of the partnership’s income or loss from carrying on a trade or business is net earnings from self-employment. A partnership with profits or losses must file a federal income tax return. (For more information on the tax aspects of a partnership, the reader may wish to obtain IRS Publication 541, Partnerships. This publication and partnership tax forms may be downloaded from the IRS’s Web site, www.irs.gov.)

Each partner is an agent of the partnership for purposes of its business. A partnership may file, with the Arizona Secre­tary of State, a statement of partnership authority. This state­ment may state the authority, or limitations on the authority, of some or all of the partners to enter into transactions on behalf of the partnership and any other matter.

A partnership is liable for loss or injury caused to a person by the conduct of a partner acting in the ordinary course of partnership business, or with authority of the partnership. Generally, all partners are liable for all obligations of the part­nership. This is referred to as personal liability.

Legal Tip

Personal liability can be avoided or limited by the use of another form of business entity (e.g., corporation, limited lia­bility company, limited partnership, or limited liability part­nership). For this reason, partnerships should be avoided whenever possible. However, because a partnership may be formed regardless of whether the persons intended to form one, anyone who receives a share of the profits of a business should take steps to ensure that a partnership was not inad­vertently formed (and, if one was, convert it to another form of business entity).