Entering a business venture with a partner can be an exciting prospect, but you want to be sure that your business relationship can endure for the long haul. Fortunately, you have a few options for the way you structure your partnership, to protect all parties involved, and to establish how your business will operate. There are fundamentally three common partnership types: general partnership, limited partnership and limited liability partnership. Each has its merits, so you should carefully consider which is best for your business.
Advantages of a General Partnership
- Easy to Create: All you have to do is begin your business operations, and your general partnership is up and running! However, you would be wise to designate the role of each partner and their responsibilities by creating a formal Partnership Agreement. Your agreement should also outline how profits and losses will be distributed, and define the conditions under which the partnership might be terminated.
- Low Operational Costs: You do not have to pay state filing fees or franchise taxes with a GP, although you will still be required to acquire a business license and any other necessary permits for your type of business.
- Few Administrative Requirements: Unlike a corporation, a general partnership is not required to hold meetings, maintain minutes or create a board of directors. You are also not required to keep your personal assets separate from those of the business.
- The Down Side of GPs: General partnerships do not offer liability protection for the partners, who by law are considered to be the same as the business. Therefore, each partner’s personal assets can be considered business assets. Partners in a general partnership bear responsibility for the actions of the other partners.
Advantages of a Limited Partnership
- Great Choice for Short-Term Ventures: An LP is often the business structure of choice for short-term projects, like film production or family estate planning.
- Limited Partners have Limited Liability: In an LP, the general partner or partners have unlimited liability, meaning their personal assets can be used to satisfy business debts and other liabilities. Limited partners are typically investors, for whom liability is limited to the amount they invested.
- Only General Partners are Involved in Management: Limited partners are not involved in the business’ day-to-day operations, leaving the general partners to run things as they see fit.
Advantages of a Limited Liability Partnership
- LLPs are Reserved for Professional Service Businesses: Doctors, dentists, attorneys, architects and other professional service providers may form an LLP
- Personal Assets are Protected: Business debts and liabilities do not affect the personal assets of any of the partners. However, individual partners are each responsible for liability arising from personal malpractice.
General partnerships, limited partnerships and limited liability partnerships are all taxed in the same way. No tax is paid by the partnership as a whole, but rather individual partners file Form 1065, along with Schedule K, with their individual income tax returns. Schedule K details the individual parter’s share of the business income and expenses.
Forming a business with one or more partners calls for careful attention to detail concerning the distribution of responsibilities and benefits to each partner. Clearly outlining the details and selecting the best entity for your partnership can save you money and frustration down the road. Windsor offers expert advice on establishing your partnership, removing the guesswork and making sure you get off to the best possible start. Contact us today for a business consultation.