OMNI LAW
Partnership Formation Lawyers — General Partnerships,
LPs, and LLPs
We form partnership entities 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 persons or entities who share profits, losses, with management rights depending on the partnership type and agreement. 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, documented correctly, is efficient, tax-flexible, and durable.
Omni Law forms entities 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 or document 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 persons or entities who carry on a business together for profit. There are three main types commonly used in U.S. business law:
- General Partnership (GP) — partners generally have management rights and is personally liable for partnership debts
- Limited Partnership (LP) — at least one general partner manages and is personally liable; limited partners usually contribute capital and have limited liability, but there are exceptions
- Limited Liability Partnership (LLP) — at least one general partner manages and has personal liability; limited partners usually contribute capital and have limited liability so long as they do not take on a general-partner role.
Partnerships are generally 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) — often a structure to convert out of
A general partnership forms automatically when two or more persons or entities carry on a business for profit together — no filing required. That convenience is also a trap. Each general partner has personal liability for partnership debts and obligations, including certain acts of other partners. The risk is especially high when owners believe they are operating informally, but the law treats them as partners anyway. GPs remain common in some informal contexts, but for many operating businesses, an LLC, LLP, or LP may provide a better liability and governance structure.
Limited Partnership (LP) — the standard for funds and syndications
An LP has at least one general partner who manages the business and generally has personal liability for partnership obligations, plus one or more limited partners who contribute capital, share in profits, and generally have limited liability and limited management rights, subject to state law and the partnership agreement. LPs are the standard structure for:
- Venture capital funds and private equity funds
- Hedge funds and other private funds, often with an LLC or corporation serving as the general partner
- Real estate syndications
- Family limited partnerships for estate planning
Limited Liability Partnership (LLP) — a common structure for licensed professional firms
An LLP generally gives partners liability protection from certain partnership obligations, including many claims arising from the negligence and misconduct of other partners. LLPs are commonly used by:
- Law firms
- Accounting firms
- Architecture firms
- Other professional firms in states that permit LLPs
Each partner remains generally liable for their own malpractice, misconduct, and supervisory responsibilities, but may be protected from personal liability for claims arising from another partner’s conduct. Some states extend full LLP protection broadly to partnership debts and obligations; others provide a narrower shield. The scope of protection should be reviewed before choosing the LLP form.
When to choose something else
If you want a shared operating business with liability protection but no specific need for a partnership entity, an LLC is usually simpler.
If you plan to raise venture capital or grant broad equity to employees, a corporation is often the better fit.
If you are co-investing or collaborating 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 treatment you expect, and any investor expectations, then recommend the structure that fits.
1. State filings
- For LPs: we file the Certificate of Limited Partnership with the appropriate state filing office and designate a registered agent
- For LLPs: we file the Statement of Qualification (or equivalent) and review the scope of the state-specific liability shield
- For GPs: no state filing is typically required, but we 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 how the partnership actually operates. We draft custom agreements covering:
- Capital contributions and how additional capital calls are approved and funded
- Profit, loss, and distribution allocations — including tax-sensitive special allocations when economics do not match ownership percentages
- Management authority, including general partner powers, limited partner consent rights, officer or manager roles, and reserved matters
- Voting thresholds for major decisions
- Admission of new partners and withdrawal procedures
- Transfer restrictions, rights of first refusal, drag-along rights, tag-along rights, and permitted transfers
- Buy-sell provisions covering death, disability, retirement, and withdrawal, termination of employment, and other separation events, 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) when appropriate for the offering
- Investment Advisers Act, broker-dealer, and securities-law exemption analysis, including Reg D Rule 506(b) or 506(c) when applicable
- GP entity formation, often an LLC or other limited-liability, and management company structure
- Carried-interest waterfall mechanics
- Management fee, expense allocation, and reimbursement mechanics
4. EIN, banking, and post-formation setup
We obtain the partnership’s Employer Identification Number, prepare initial banking and authority resolutions, register for applicable state tax accounts, and file foreign qualifications in states where registration is required.
5. Annual maintenance and renewals
For LLPs, we calendar the annual or biennial renewals, registrations, and reports required to maintain LLP status. Missed filings can result in penalties, loss of good standing, administrative revocation, or loss of LLP liability status, depending on the state. For LPs, we handle annual reports, franchise-tax filings, registered-agent updates, and other recurring state compliance obligations. We also handle partner admissions, withdrawals, and buyouts as the business evolves.
Tax and compliance obligations
Pass-through taxation under Subchapter K
Partnerships are generally treated as 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 partnership entity generally pays no federal income tax at the entity level. Partners pay tax on their allocated share whether or not the partnership distributes cash.
Special allocations and substantial economic effect
A core tax feature of a partnership is the ability to make special allocations that do not simply follow ownership percentages. That flexibility can be useful when one partner contributes capital and another contributes labor or IP. To survive IRS scrutiny, the allocation must satisfy the “substantial economic effect” requirement of Section 704(b) or otherwise reflect the partners’ interests in the partnership 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 generally pay self-employment tax on their share of ordinary business income and on guaranteed payments for services
- Limited partners typically do not pay self-employment tax on their distributive share, but guaranteed payments for services are generally included in self-employment income
- The treatment of LLC members, fund managers, and service partners can be fact-specific and has received ongoing IRS and court attention, so partnership agreements should be coordinated carefully with tax advisors
State franchise taxes and renewals
- California charges an $800 minimum annual tax on LPs and LLPs
- New York has annual filing and publication requirements for LPs and LLPs
- Most states require annual or biennial reports, renewals, tax payments, or registered agent maintenance
- 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. Under those rules, IRS audit adjustments may be assessed and collected at the partnership level rather than flowing through to individual partners. We draft agreements to designate the partnership representative, allocate audit-related liabilities among current and former partners, and establish who decides whether the partnership will elect out or use available adjustment procedures when eligible.
Section 754 election
When a partner sells their interest or dies, a Section 754 election may allow the partnership to adjust the tax basis of its assets or the affected partner or transaction. The election can help reduce distortions in depreciation, amortization, and gain or loss recognition after a transfer or distribution. Whether to make the election is a planning decision we discuss at formation and revisit when transfers, redemptions, or major distributions occur.
Basis and at-risk rules
Partners generally can deduct partnership losses only to the extent allowed by the basis, at risk, passive activity, and other applicable loos-limitation rules. A partner’s outside basis generally starts with capital contributions and is adjusted over time for income, losses, distributions, and the partner’s share of partnership liabilities. Liability allocations can increase basis in debt-financed ventures, depending on the type of debt and how liabilities are allocated. The at-risk rules may further limit deductions, especially where the partner is protected from economic loss or the debt is nonrecourse. Tracking basis correctly across years matters, and errors compound over time.
Common mistakes we prevent
- Operating as a general partnership without realizing it — without the liability protection partners assumed they had
- Skipping the written partnership agreement and relying on state default rules that often do not match what the partners want
- Missing LLP renewal deadlines, which can result in penalties, loss of good standing, administrative revocation, or loss of LLP liability status, depending on the state
- Allocating profits and losses improperly – using allocations that do not satisfy Section 704(b) or otherwise reflect the partners’ interests
- 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
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, including agreements, subscription documents, PPMs where appropriate, GP entities, and securities exemption analysis, 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 the partnership and generally have personal liability for partnership obligations,) and limited partners who usually contribute capital and have limited liability and limited management right. are liability-protected as long as they don’t participate in management). A A limited liability partnership (LLP) usually has one class of partners who retain management rights while receiving liability protection for certain partnership obligations, subject to state law. LPs are commonly used 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 may govern everything from profit splits to what happens when a partner dies — and those defaults often do not 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 generally pay self-employment tax on their distributive share of ordinary business income and on guaranteed payments for services. 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 generally treated as 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, but partners may pay tax on their share on their own tax 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 through a statutory conversion, merger, or other state-law transaction, depending on the jurisdiction. Partnerships can also convert to corporations, though the structure and tax consequences require careful planning. Some conversions may qualify for tax-deferred treatment under Section 351 or Section 721, depending on the transaction structure and the assets, liabilities, and owners involved.
What is a Section 754 election?
A Section 754 election may allow the partnership to adjust the tax basis of its partnership assets for an affected partner or transaction when a partner sells their interest or dies. The election can help reduce 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 federal partnership audit rules. Under those rules, IRS audit adjustments may be assessed and collected at the partnership level unless an election out, push-out election, or other permitted procedure applies.. The partnership designates a partnership representative who acts on behalf of the partnership during the audit. Certain partnerships with 100 or fewer eligible partners may be able to elect out annually, but eligibility depends on partner type and ownership structure.
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.