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General Partnership - Explained - YouTube
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Okay. Let's talk about a general
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partnership.
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Well the general partnership is the
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default entity when two individuals
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carry on some form of business activity
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for an intended profit and they intend
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to in some way share those profits.
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Now it may be a partnership arrangement and
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individuals not even know it, okay, so the
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individuals that are in the partnership
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don't have to necessarily intend to be
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partners it simply arises by their
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conduct they're carrying on of some form
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of activity for an intended profit and
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with the intent to share those profits
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even if the business only incurs a loss
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you can you are still partners in that
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scenario. Okay. So let's go through the
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individual elements of the business.
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So first is creation like we said it simply
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has to be some form of activity that you
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carry on you don't have to file anything
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with the state government further there
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are no maintenance requirements, okay, you
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don't you aren't required to have
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meeting minutes etc, it's again the
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business entity is very similar to a
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sole proprietorship and that it requires
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very little almost no maintenance
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requirements. Okay. Continuity like the
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sole proprietorship the general
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partnership has very little or no
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continuity okay by default. Now you can't
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have a partnership agreement that
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changes this that says okay
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one individual if they wish to leave the
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partnership can do so under these
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circumstances or an interest in the
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partnership can be sold or traded to
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someone else
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etc but by and large by default if an
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individual leaves the partnership then
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the partnership dissolves, okay, without a
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document changing that a partnership
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agreement that changes that there is no
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continuity there is no passing an
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interest in the partnership down to say
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your heirs and assigns because upon
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passing away the partnership resolves.
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Now your interest in it may be
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liquidated and you can take the value of
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your interest out and pass that down but
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nonetheless
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the actual interest to continue the
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partnership it dissolves so that
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can't be passed down. Okay. Next would be
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control of the partnership well this is
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very important for agent the agent
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liability because any partner in a
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general partnership by default has
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complete authority to act on behalf of
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the business. Now even though the
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individuals inside the partnership
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intend to limit the ability of an
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individual or a partner to act on behalf
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of the partnership by default they have
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this level of authority and when they
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deal with outside parties even if a
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partnership agreement limits the
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authority of the partner in dealing with
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third party is on the outside the third
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party is justified in believing that any
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partner can act and do anything on
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behalf of the business, so this can
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create a issue of liability that
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partners who don't want to face they
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don't want to face, what we'll talk about
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later personal liability for the actions
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of the other partner or they don't want
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this partner to have control or them to
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be the ones responsible for this level
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of activity so control is by default
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equal. Okay. In a partnership again
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ownership can be split up in whatever
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percentage the partners want pursuant to
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a partnership agreement if there's no
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partnership agreement in place dividing
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the ownership in some specific manner
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then the default ownership structure is
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50/50 or if you have three owners 33, 33,
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33, etc, it's equal between the between
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the partners so in order to change that
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there needs to be some agreement in
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place otherwise that is the default, okay,
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so that's ownership and control. Okay.
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Next would be personal liability there
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is no personal liability protection for
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the partners, okay, so the home car bank
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accounts etcetera of each partner is
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subject to liability for any debts or
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liabilities of the business. Okay. So this
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creates a very dangerous scenario where
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you have agents working on behalf of the
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business whether it's one of the
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partners or whether it's employee
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ease of the partnership. Okay. If an
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employee or a partner does something
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that creates liability for the business
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maybe a debt in contract or maybe
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liability in tort through an accident of
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sorts then the personal assets of each
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partner will be subject to the reach of
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those creditors of those individuals
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trying to collect against the business,
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so this is a very very dangerous
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situation for you the individuals to a
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structure for individuals to carry on
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business in terms of limited liability,
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okay, because there is none. And then we
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have compensation well generally
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partners of a partnership are not
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entitled to a salary, okay, like a sole
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proprietorship any profits of the
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business are distributed to the owners
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the partners in respect to their
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ownership interests. Now again and there
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can be a partnership document that makes
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special allocations to partners that say
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we own the partnership 50/50 but we make
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a special allocation when you get sixty
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percent of the profits and I get forty
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percent of the profits, well that's fine
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now the IRS has an economic reality test
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that says that this has to be based on
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some economic reality that there has to
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be because of some level of input into
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the business some level of activity in
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the business by one individual to have
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this disparity in earning but you can do
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it, okay, but the default role if you
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don't have that in place is that profits
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go to the partners to compensate them
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50/50 and at the end of the year with
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regard to taxation each partner is taxed
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on the entirety of their or their profit
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interest in the business, so if we split
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profits 50/50 even if we leave those
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profits in the business we are still
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taxed individually on those profits.
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Now a partnership creates a issue of
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reporting because you have two
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individuals who have to report a certain
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share of the profits of a business
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activity, so the partnership has to file
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special forms generally called a k1 as
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an informational form to the IRS, right,
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or excuse me they file an informational
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form with the IRS and they they send K1's
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to the individual partners to
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indicate to the partners what level of
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compensation there was a received and
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what amount they are subject to taxation
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for their receipt of profits from
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the business. Okay. So those are all the
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elements of partnership.
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