Formation, Operation and Dissolution of Business (Miami)
After we spoke about the benefits and downfalls of different business organizations for real estate investment, in this article we will go a little further in explaining the processes of formation, operation and dissolution of partnerships and corporations. We won’t be discussing sole proprietorship because generally, the processes involved are very simple and straightforward. However, if you need more information or assistance with this, please do contact us. This will give you an even clearer picture of what structure would be best for your unique scenario as a real estate investor.
Formation of a Partnership
In general, the law that governs partnerships is determined by the courts. The main acts ruling in almost all states are the Uniform Partnership Act (UPA) (except in Georgia and Louisiana) and Uniform Limited Partnership Act (ULPA) (except in Louisiana). According to those acts a partnership is an association between two or more individuals that have come together to carry on as joint owners of a business. Generally, an oral agreement of a partnership is acceptable under the law. However, we would always recommend that you craft a good written agreement that is signed by all partners. This helps significantly if any issues with taxation arise or if the partners want to distribute profits and losses according to the size of their investment and not equally as per presumption. A written agreement is necessary for:
Compensations and distributions of capital contributions and interest
Buy and sell provisions
Operation of a Partnership
How the partnership will operate in most cases is controlled by the (written) agreement, the law and UPA or ULPA (whichever is applicable). Here are the general principles, right and duties of partnerships:
In general partnerships, partners have equal rights to management and decision making, even though the shares may not be equal.
The majority can overrule the minority on small matters.
Partners cannot get paid for the services they provide as part of the partnership, unless the written agreement allows it.
No interest is distributed on capital investment.
The distributions on investment are based on the profits/losses share and the cash flow.
Each partner is allowed to inspect the books and make copies.
A partner can request for an accounting suit upon dissolution of the partnership.
Each partner has equal right to use the partnership property for any activities related to serving the firm and no right to use it for other purposes.
Each partner can act as an agent of the partnership and sign deals on its behalf.
Dissolution of a Partnership
When partners stop doing business together they enter the first stage of ending the partnership as a business organization - dissolution. The next two phases are winding up and termination, where assets are converted to cash, creditors are paid off and all profits and losses are distributed to the partners.
For dissolution to occur if at least one of following events has happened:
Consent of the partners
Operation of the law
When a partner leaves the partnership or a new one joins
Violation of the agreement
In many cases partnerships are designed with a fixed lifetime (the length of a particular project). However, if not specifically outlined in the agreement, a partner can withdraw at their own will, which leads to dissolution.
When the partnership get to the next stage, named as winding up, liquidation of assets begins. After the firms has paid all that is owed to creditors, the assets are distributed to partners as follows:
Individual loans including interests are repaid.
Each partner receives their own contribution to the capital.
The remaining profits are distributed equally or as per the written agreement.
In the case of a loss, the creditors still have to be paid first and the the loss is distributed to partners either equally or as per the agreement. Read more Protected content