I hear people refer to those with whom they do business as their “partners” frequently. I even hear this from people who are really shareholders in a corporation or members in a limited liability company. I am fairly certain that if most of them understood the potential liability of forming a true partnership, they would never call themselves someone’s partner ever again. Partnerships are relatively easy to form (beware: some court decisions and Nevada’s statutes have held that a partnership can be formed just by telling those with whom you are doing business that you and another person are “partners”), requiring simply an association of two or more persons doing business together for a profit. NRS 87.060(1). Every partner is a fiduciary to the other partner(s). That means the partner has a legal duty to act in the best interests of his or her partners and of the partnership rather than acting in his or her own interest. NRS 87.210.
Partnerships are disfavored by many attorneys because they expose clients to unnecessary potential liability. The liability of the partner for the debts of the partnership are unlimited. Partners are also jointly and severally liable for the debts of the partnership and for the mistakes of every other partner in relation to the partnership. In other words, each partner is liable not only for his or her share of the partnership debt (based on percentage of ownership), but is also liable for the entire amount of debt of the partnership. If I hypothetically sue three partners in a partnership and obtain a judgment, I can choose to collect 100% of the judgment against each of the partners or any of them individually, at my election. If partner number 3 has collectible assets and the others do not, I can choose to only take money from that partner and leave all other partners alone.
Nevada recognizes general partnerships, limited partnerships, limited liability partnerships, and limited liability limited partnerships. A general partnership if formed without any formal filing requirement. Two people doing business for profit or holding themselves out to the public as doing business together for profit are a partnership.
General partnerships formed after June 30, 2006 are governed by the Uniform Partnership Act of 1997 (NRS 87.4301, et. seq.) Those formed earlier or who elect so elect are governed by the Uniform Partnership Act of 1914 (NRS 87.010 et. seq.). General partnerships formed after June 30, 2006 without an express agreement otherwise, are presumed in the law to agree to:
1) share equally in all profits and losses;
2) have equal rights to manage the affairs of the partnership; and
3) have no right to receive pay for the acts benefiting the partnership.
A limited partnership (“LP”) must register with the State of Nevada. A partner in an LLP formed after October 1, 2007 cannot be held liable for the debts of the LP by participating in the control of the business NRS Chapter 87A (Uniform Limited Partnership Act of 2001). A partner in an LLP formed before October 1, 2007 can be held liable for the debts of the LP by participating in the control of the business in certain situations. NRS Chapter 88 (Uniform Limited Partnership Act of 1976). A limited partner is only personally liable for the obligations of the LP if the limited partner is also a general partner, allows his or her name to be used in the name of the LP, or exercises control of the business. Otherwise, he/she is not liable for the obligations of the LP. As the general partner has unlimited liability, many attorneys recommend against forming an LP.
Limited Liability Partnerships
A Limited Liability Partnership (“LLP”) is only available to those offering traditional professional services (Accountants, attorneys, etc.) and must register with the State of Nevada. A partner in an LLP is not liable for the acts, obligations, etc. of any other partner in the LLP or of the LLP itself, but can be held liable personally for his own omissions, negligence, wrongful acts, misconduct or malpractice, and for that of any person under his supervision. NRS 87.440 et. seq. The limited partners have no control over the operations of the partnership and are merely silent investors.
Limited Liability Limited Partnership
A limited liability limited partnership (“LLLP”) must register with the State of Nevada. An LLLP has one or more general partners and one or more limited partners. Unlike in an LP, the general partner of an LLLP, who runs the partnership, has limited liability for the debts and obligations of the partnership. NRS 87A.630 et seq. The limited partners have no control over the operations of the partnership and are merely silent investors.