Choosing what type of entity your business will be is an essential part of business planning. A partnership is two or more people working together for a profit. There are two basic types of partnerships, general partnerships and limited partnerships.
There is no requirement to create a partnership agreement, however it is smart to do so. A Written partnership agreement helps to avoid misunderstandings between partners and a failure to have a written agreement will result in default rules based on the states statute. A written agreement also permits the partners to discuss various aspects of the business and expectations of the partners.
A General Partnership is the simplest and least expensive partnership to operate. It does not require any documentation to form, nor does it require anything to be filed with the state to establish. Partners are personally liable for all business debts and obligations, including court judgments. This means that if the business itself can’t pay a creditor, such as a supplier, lender, or landlord, the creditor can legally come after any partner’s house, car, or other possessions.
A Limited Partnership is a lot like a General Partnership, with one key difference. A Limited Partnership has at least one General Partner who controls the company’s day-to-day operations and is personally liable for business debts and obligations, and at least one Limited Partner, which are passive investors whose limits of liability are limited to the amount he/she has contributed. General partners are personally liable for all business debts and obligations, including court judgments. This means that if the business itself can’t pay a creditor, such as a supplier, lender, or landlord, the creditor can legally come after any partner’s house, car, or other possessions. A Limited Partner can lose the limited liability protections if they become more active, such as managing aspects of the business.
Limited Liability Company
A Limited Liability Company (LLC) is not a partnership, but is a common alternative to a partnership. The LLC provides liability protections to the partners that a partnership does not permit. The LLC typically provides the best features of a corporation and a partnership.
In both general and limited partnerships, general partners have unlimited personal liability since they manage their respective businesses. When handling partnership business, general partners are liable for their own conduct as well as the acts of their fellow general partners, known as joint and several liability. Limited partners only risk their capital contributions in limited partnerships, similar to shareholders in a corporation or members in an LLC. However, if a limited partner participates in managing the business or signs a personal guarantee for the business they may be held personally liable for these business obligations.
LLC members typically are not personally liable for LLC debts or legal liabilities, putting only their financial contributions to their LLC at risk. LLC owners may still be personally liable for their own conduct that harms others, for breaches of their duties owed to their LLC or personally guarantees LLC loans. Any business owner should consider appropriate insurance and other liability protection strategies to help shield personal assets and business resources.