QUESTION

Am I still responsible if a lease agreement has me listed as a sole proprietorship when I am primary in a partnership?

Asked on Jan 08th, 2012 on Taxation - Oregon
More details to this question:
I am primary in a 1065 partnership. The mall where I want to rent has me listed as a sole proprietorship if I still owe on the lease should the business fail. Could I still be held accountable for the remainder with this error? What does this mean in regards to my taxes? I gave my number to them so they are aware of my classification.
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3 ANSWERS

Tax Law Attorney serving Birmingham, AL at Meadows & Howell, LLC
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I am assuming that you are issued a K-1 for this partnership. If so, then the K-1 (and your partnership agreement) should indicate your percentage interest in the profit, loss, and capital of the partnership. If there are any contracts or agreements which list you as a sole proprietor, then you should have this changed. Although the owner of the mall property which you are leasing may be aware of your business's status as a partnership, and although they may be aware that you are generally responsible for only X% of the business losses, it's still completely possible for one partner to sign a lease and take on all responsibility for that particular agreement. The owner of the property has no idea how your partnership agreement (assuming one exists) is worded, and so although you may technically only share X% of overall losses, you may very well have a clause in a partnership agreement which indicates that you share 100% of all losses/debts related to lease properties. Ultimately, it's best to have all agreements correspond with one another, as opposed to having a lease agreement which contradicts your partnership agreement. Although you may be able to get things straightened out should anything occur, you would have to do so in a court of law, which will take time and money. My advice would be to get the lease agreement corrected now so as to prevent problems in the future.
Answered on Jan 20th, 2012 at 3:41 PM

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Unless you are a limited partner in your partnership, you would be personally liable, along with your partner(s) for any partnership debt remaining after the partnership goes out of business. By signing as a sole proprietor rather than on behalf of your partnership, you would be losing the chance to have your partner(s) share in the liability.
Answered on Jan 20th, 2012 at 2:20 PM

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If it is a general partnership (or a limited partnership in which you are a general partner), you are personally liable for the partnership's debts in essentially the same manner as if it were a sole proprietorship.
Answered on Jan 20th, 2012 at 2:14 PM

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