Foundations of New Venture Finance 283the owner dies, retires, or goes out of business. It cannot be transferred to another per-
son as a going concern. The owner is personally liable for all legal and financial business
activities.
Partnership. A partnership is defined as a voluntary association of two or more per-
sons to act as co-owners of a business for profit. All partnerships should be regulated
with partnership agreements conforming to the Uniform Partnership Act. This agree-
ment should cover such issues as:
- The contribution and participation requirements of each partner
- The allocation of profits and losses
- Responsibilities and duties
- Salaries and compensation contracts
- Consequences of withdrawal, retirements, or deaths
- The manner and means by which the partnership will be dissolved
Partnerships are not considered separate entities for tax purposes. The partners are
taxed at only one level, that of the partner. Earnings flow proportionately to each indi-
vidual, and the tax treatment is then similar to that of the sole proprietor. A partnership
ceases to exist on the death, retirement, or insanity of any of the partners, unless a pro-
vision for continuation has been made in the partnership agreement.
There are two types of partnerships. A general partnership has only general part-
ners and conforms to the description and limitations just listed. A limited partnership
has both general and limited partners. The general partners assume responsibility for
management and have unlimited liability for business activity. They must have at least
a 1 percent interest in the profits and losses of the firm. The limited partners have
no voice in management and are limited in liability up to their capital contribution
and any specified additional debts. A limited partnership can have no more than 35
owners.
The family limited partnership is a special case. These legal structures are set up to
provide for continuation of a family firm when the founder retires or dies. Estate taxes
on family firms frequently create a cash crisis for the survivors. Sometimes they have to
sell the venture in order to pay the taxes. Careful succession planning can mitigate this
problem, and the family limited partnership can play a role. Founders and family mem-
bers must be careful not to run afoul of the Internal Revenue Service when using these
partnerships. The IRS has stepped up scrutiny and audits since it discovered that many
such partnerships are used primarily to evade taxes rather than to secure succession.^34
One of the often unanticipated problems of partnerships is that partners are agents for
each other. The actions of one partner can cause unlimited personal liability for all the
others. This is referred to as joint and several liabilities.
C Corporation. A corporation (also called a regular C corporation for the section of
the law that describes it) is a separate legal person under the laws of the state within
which it is incorporated. Its life continues even after the founders or managers die or
retire. The central authority resides with the board of directors, and ownership resides
with the stockholders. Shares may be bought and sold freely. No investor is liable be-