Is a partnership the right entity for my new business?

Perhaps the most important decision you'll make when starting your business is what type of business entity you will choose. The most common business entities are a sole proprietorship, partnership, limited liability company, and corporation. In the second part of this series, we will discuss the pros and cons of the partnership.

Partnership

A partnership is formed when two people agree to work together and share the profits of their business. In its simplest form it is two teenagers splitting the profits from their lawn mowing business. The most common partnerships usually involve friends or relatives coming together as co-owners of a for-profit business.

There are generally two types of partnerships, a general partnership and a limited partnership.

General Partnership

A general partnership is one in which there are no limited partners, i.e., There are no partners who are investors only and do not participate in the management of the business.

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Pros

  • General partnerships are permitted to engage in any type of business or profession.
  • There are no formal requirement for organizing a general partnership.
  • Although a partnership agreement is usually necessary, the agreement can be oral.
  • For tax purposes income is only taxed once, the partners are required to report the profits and losses on their individual income tax returns.

Cons

  • Each partner will be subject to unlimited personal liability with respect to the obligations and liabilities of the partnership.
  • Each partner has the ability to unilaterally bind the partnership, unless acting outside the scope of authority.

Limited Partnership

A limited partnership is a partnership where there are one or more general partners and one or more limited partners, i.e., at least one partner is an investor only.

Pros

  • Attractive option for raising capital.
  • Limited partners, i.e., investors, have liability limited to the amount of their capital contributions.
  • General partners maintain management control of the business.
  • For tax purposes income is only taxed once, the partners are required to report the profits and losses on their individual income tax returns.

Cons

  • Requires more formalities than a general partnership, such as filing a certificate of limited partnership with the state and the creation of a partnership agreement.
  • General partners remain personally liable for all partnership debts, obligations, and liabilities.
  • Certain formalities must be observed in order for limited partners to enjoy a shield from personal liability.

Summary

Choosing a partnership for your new business is generally appropriate in situations where your business is likely to remain small and the potential exposure to liability is minimal. If this is the case and you are seeking to raise capital without relinquishing control of your business, then a limited partnership might be a good choice for you. However, if you would like to avoid any risk of personal liability, a limited liability company or corporation may be a better choice.

If you have any questions regarding your new business, or would like to determine if a partnership is right for you, schedule a free consultation with J.Cutler Law.