OMNI LAW
Partnership Formation Lawyers — General Partnerships,
LPs, and LLPs
We form partnerships and draft partnership agreements for professional firms, fund vehicles, and shared-ownership ventures across multiple states.
A partnership is a business owned by two or more people who share in profits, losses, and management. It is one of the oldest entity forms in U.S. law and remains the right choice for certain professional practices, family businesses, and investment vehicles — but only when structured deliberately. The wrong kind of partnership can leave you personally on the hook for your partner’s mistakes; the right kind, properly papered, is efficient, tax-advantaged, and durable.
Omni Law forms partnerships across multiple states and drafts the partnership agreements that determine how the business actually runs. Below is what a partnership is, when each type makes sense, how we form one, and the tax and compliance obligations that come with it.
What is a partnership?
A partnership is a legal business arrangement between two or more partners who agree to operate a business together for profit. There are three main types under U.S. law:
- General Partnership (GP) — every partner manages and is personally liable for partnership debts
- Limited Partnership (LP) — at least one general partner manages and is personally liable; limited partners contribute capital and are liability-protected
- Limited Liability Partnership (LLP) — all partners share management; all are protected from liability for other partners’ negligence
All partnerships are pass-through entities for federal tax purposes. The partnership itself files an information return; partners pay tax on their share of partnership income on their personal returns.
When to choose each type of partnership
General Partnership (GP) — usually a structure to convert out of
A general partnership forms automatically the moment two or more people carry on a business for profit together — no filing required. That convenience is also the trap. Every general partner has unlimited personal liability for the partnership’s debts and for the acts of every other partner. Anyone operating a GP without realizing it has one foot in the courtroom. GPs remain common in some informal contexts, but for almost every operating business, an LLC, LLP, or LP is the better answer.
Limited Partnership (LP) — the standard for funds and syndications
An LP has at least one general partner who manages the business and bears unlimited liability, plus one or more limited partners who contribute capital, share in profits, and are shielded from liability so long as they do not participate in management. LPs are the standard structure for:
- Venture capital funds and private equity funds
- Hedge funds (where the GP is usually itself an LLC for liability reasons)
- Real estate syndications
- Family limited partnerships for estate planning
Limited Liability Partnership (LLP) — the structure for licensed professional firms
An LLP gives every partner liability protection from the negligence and misconduct of other partners. LLPs are the dominant structure for:
- Law firms
- Accounting firms
- Architecture firms
- Other professional partnerships in states that permit them
Each partner remains liable for their own malpractice but is shielded from a colleague’s. Some states extend full LLP protection to all partnership debts; others limit the shield to professional liability only — worth examining carefully before you organize.
When to choose something else
If you want a shared operating business with liability protection but no specific need for partnership taxation, an LLC is usually simpler.
If you plan to raise venture capital or grant broad equity to employees, form a corporation.
If you are co-investing with another company on a specific project, a joint venture may be the right structure.
GP vs. LP vs. LLP at a glance
| Feature | General Partnership | Limited Partnership | LLP |
|---|---|---|---|
| State filing required | No | Yes (Certificate of LP) | Yes (Statement of Qualification) |
| Number of partners | 2+ | 2+ (1 GP + 1 LP minimum) | 2+ |
| Personal liability | Unlimited for all | Unlimited for GP only | Limited for all partners |
| Management | All partners | GP only | All partners |
| Common use | Informal arrangements | Funds, syndications | Professional firms |
| Federal tax | Pass-through | Pass-through | Pass-through |
| Self-employment tax | All partners | GP only | All partners (with nuance) |
| Annual renewal | None | Annual report | Annual or biennial renewal |
How Omni Law forms your partnership
Partnership work begins with honest entity selection: GP, LP, LLP, or convert to an LLC. We work through your liability profile, the licensing rules that apply, the tax outcomes you want, and any investor expectations, then recommend the structure that fits.
1. State filings
- For LPs: we file the Certificate of Limited Partnership with the Secretary of State and designate a registered agent
- For LLPs: we file the Statement of Qualification (or equivalent) and confirm the state-specific liability shield available
- For GPs: no state filing is required, but we strongly recommend a written agreement and often advise converting to an LLC or LLP for liability protection
2. The partnership agreement (the work that matters)
The partnership agreement is the core deliverable, and it does the heaviest lifting in the formation. We draft custom agreements covering:
- Capital contributions and how additional contributions get funded
- Profit, loss, and distribution allocations — including special allocations under Section 704(b) “substantial economic effect” rules
- Management authority — the GP’s powers; the limited partners’ protected activities under the safe harbor
- Voting thresholds for major decisions
- Admission of new partners and withdrawal procedures
- Transfer restrictions, rights of first refusal, drag-along/tag-along
- Buy-sell provisions covering death, disability, retirement, and withdrawal — with valuation methodology and payment terms
- Deadlock resolution mechanisms
- Dissolution and winding-up procedures
3. Fund formation work
For venture, private equity, real estate, or family investment vehicles, we coordinate the LP agreement with the related documents:
- Subscription agreements for incoming LPs
- Private placement memorandum (PPM) if marketing to outside investors
- Investment Advisers Act and securities-law exemption analysis (Reg D Rule 506(b) or 506(c))
- GP entity formation (typically an LLC for liability reasons) and the management company structure
- Carried-interest waterfall mechanics
- Management fee mechanics
4. EIN, banking, and post-formation setup
We obtain the partnership’s Employer Identification Number, prepare initial banking and authority resolutions, register state tax accounts, and file foreign qualifications in states where the partnership operates.
5. Annual maintenance and renewals
For LLPs, we calendar the annual or biennial renewal. Most states require LLPs to re-register or file an annual report to maintain the liability shield, and a missed deadline can convert you back to a general partnership without warning. For LPs, we handle annual reports and franchise-tax filings. We also handle partner admissions, withdrawals, and buyouts as the business evolves.
Tax and compliance obligations
Pass-through taxation under Subchapter K
Partnerships are pass-through entities under Subchapter K of the Internal Revenue Code. The partnership files Form 1065 (an information return) and issues Schedule K-1 to each partner reporting their share of income, deductions, and credits. The entity itself pays no federal income tax. Partners pay tax on their allocated share whether or not the partnership distributes cash.
Special allocations and substantial economic effect
The signature flexibility of partnership tax is the ability to make special allocations that don’t match ownership percentages — useful when one partner contributes capital and another contributes labor or IP. To survive IRS scrutiny, the allocation must have “substantial economic effect” under Section 704(b), which means the partners’ capital accounts are maintained according to the regulations and liquidating distributions follow positive capital account balances.
Self-employment tax
- General partners (including the GP of an LP) generally pay self-employment tax on their share of partnership income
- Limited partners typically do not pay self-employment tax on their distributive share, though guaranteed payments for services are treated differently
- The treatment of LLC members serving as the equivalent of general partners has been the subject of ongoing IRS attention — coordinate carefully with your tax advisor
State franchise taxes and renewals
- California charges an $800 minimum franchise tax on LPs and LLPs
- New York has annual filing requirements for LPs and LLPs and a publication requirement at formation
- Most states require annual or biennial reports
- LLPs typically must renew annually or biennially to maintain their liability shield
Centralized partnership audit regime (BBA)
Under the Bipartisan Budget Act of 2015, most partnerships are subject to centralized audit rules — IRS audit adjustments are assessed at the partnership level rather than flowing through to individual partners. We draft your agreement to designate a partnership representative, address how audit-related liabilities are allocated, and decide whether the partnership will elect out where eligible (partnerships with 100 or fewer eligible partners can elect out).
Section 754 election
When a partner sells their interest or dies, a Section 754 election allows the partnership to adjust the inside basis of its assets to match the new partner’s outside basis — preventing distortions in future depreciation and gain. Whether to make the election is a planning decision we discuss at formation and revisit at each transfer.
Basis and at-risk rules
Partners can deduct losses only to the extent of their adjusted tax basis in the partnership interest. Basis includes the partner’s capital contribution plus their share of partnership liabilities — which gives partners in debt-financed ventures more loss-deduction capacity than their cash investment alone would suggest. Tracking basis correctly across years matters, and errors compound over time.
Common mistakes we prevent
- Operating as a general partnership without realizing it — and without the liability protection partners assumed they had
- Skipping the written partnership agreement and relying on state default rules that almost never match what the partners want
- Missing LLP renewal deadlines, which can convert the LLP back to a general partnership without warning
- Allocating profits in ways that fail Section 704(b) and getting reallocated by the IRS
- Admitting new partners without amending the agreement, creating ambiguity about voting rights and buyout terms when conflict arises
- Mischaracterizing partner distributions for self-employment tax purposes — a common audit trigger
Pricing and what to expect
Omni Law’s flat-fee partnership formation packages start at $1,000 for a basic LP or LLP filing with a partnership agreement. Fund formation engagements (LP agreement + PPM + GP entity + securities exemption analysis) and complex multi-partner agreements with custom waterfalls are scoped to the deal and quoted before we start. State filing fees are passed through at cost. See our fee structure page for the full pricing model.
Initial consultations are free and run about 30 minutes — enough time to walk through entity choice, partnership type, tax treatment, and timing.
Frequently Asked Questions
What is the difference between an LP and an LLP?
A limited partnership (LP) has two classes of partners: general partners (who manage and are personally liable) and limited partners (who contribute capital and are liability-protected as long as they don’t participate in management). A limited liability partnership (LLP) has only one class — all partners share management and all are protected from liability for other partners’ negligence. LPs are the standard for investment funds and syndications; LLPs are the standard for licensed professional firms.
Do I need a written partnership agreement?
Yes. Even a two-person partnership should have a written partnership agreement. Without one, state default rules govern everything from profit splits to what happens when a partner dies — and those defaults rarely match the deal the partners actually intended. The cost of the agreement is small compared to the cost of resolving an ambiguous arrangement years later.
Are partnerships subject to self-employment tax?
General partners (including the GP of an LP) generally pay self-employment tax on their distributive share of partnership income. Limited partners typically do not pay self-employment tax on distributions, though guaranteed payments for services are treated differently. The treatment of LLC members serving as equivalent general partners has been the subject of ongoing IRS attention and should be coordinated with a tax advisor.
How is a partnership taxed?
A partnership is a pass-through entity for federal tax purposes. The partnership files Form 1065 (an information return) and issues Schedule K-1 to each partner reporting their allocated share of income, losses, and credits. The entity itself pays no federal income tax — partners pay tax on their share on their personal returns whether or not the cash is actually distributed.
Can a partnership convert to an LLC or corporation?
Yes. Partnerships are commonly converted to LLCs (often a one-step statutory conversion) or to corporations (typically by merging the partnership into a newly formed corporation). The conversion can usually be structured tax-free under Section 351 (for corporations) or Section 721 (for LLCs taxed as partnerships) with proper planning.
What is a Section 754 election?
A Section 754 election allows the partnership to adjust the inside basis of its assets when a partner sells their interest or dies, matching the new partner’s outside basis. It prevents future distortions in depreciation deductions and gain on asset sales. Whether to make the election is a planning decision evaluated at formation and at each partnership-interest transfer.
What is the centralized partnership audit regime?
The Bipartisan Budget Act of 2015 established centralized audit rules under which IRS audit adjustments are assessed at the partnership level rather than flowing through to individual partners. The partnership designates a partnership representative who acts on behalf of the partnership during the audit. Eligible partnerships (100 or fewer qualifying partners) can elect out annually.
How much does it cost to form a partnership?
Omni Law’s flat-fee partnership formation packages start at $1,000 for a basic LP or LLP filing with a partnership agreement. Fund formation engagements and complex multi-partner agreements with custom waterfalls are quoted on the deal. State filing fees are passed through at cost.
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Schedule a free 30-minute consultation. We’ll walk through partnership type, tax treatment, and what the agreement should say before you commit to anything.