One of your first steps as a business owner is deciding between the different types of business structures for your company. If you do not want to run your business alone, you might consider forming a partnership.
In a general partnership, a business is owned by two or more people who agree to run the company as “partners” or co-owners. Partnerships can start with as little as a handshake between two (or more) people who hope to make a profit. But, most of these businesses start with formal documents drafted by a lawyer.
You and your partner will equally share profits and losses unless otherwise agreed. Important documents, such as partnership agreements, are essential when duties and obligations are not shared equally between you. Also, formal agreements can specify how you will sell or close the company if the partnership is dissolved.
In a partnership, the business and partners are viewed as one and the same. Since the business is not a separate entity from its partners, companies are only taxed at the personal income level.
Partnerships are not taxed at the company level. That means profits are only taxed once. This is one advantage of partnerships in comparison to corporations, which are double-taxed at the company and personal income levels.
Limited partnerships are beneficial for business owners who want funding from silent investors. Usually, silent investors do not make business decisions or handle daily operations. These businesses are also beneficial for silent investors because they can invest in a business without having management responsibilities or the risk of liability.
Limited partnerships are:
- more structured than general partnerships
- created under your state’s limited partnership law
Most states have adopted a statute that specifies how business owners need to organize their company. The statute:
- requires the business to have at least one “general partner” and at least one “limited partner”
- states that the partnership is dissolved without both general and limited partners
General partners in a limited partnership
General partners are responsible for the daily management and operation of the business, and they serve as the fiduciary. Because the general partner serves as the fiduciary, s/he has unlimited personal liability for all activities conducted by the business.
The general partner exercises complete control over all company dealings and decisions.
Limited partners in a limited partnership
Unlike general partners, limited partners are passive investors with no management rights or fiduciary duties. Limited partners are sometimes called silent partners.
Limited partners are protected from personal liability for the company’s debts and losses. They only stand to lose their agreed-upon contributions to the company should the business go under.
Limited partners may assign all or part of their partnership interest to another person or beneficiary. Limited partnership agreements usually limit how partners may assign their interests. The agreements also give the other partners the right to reject the assignment.
A person assigned interest can receive a business’s profits, liabilities, and assets. But, this person cannot vote, share information, or manage the business.
A limited partner may assign a partnership interest without dissolving the partnership. This person may continue to act as a limited partner, even after granting a partnership interest, as long as the whole interest is not signed away.
Small business partnerships
If you want to work with another person to run and manage your business, a partnership might be right for you. Setting up this business structure is a relatively simple and inexpensive process. You also benefit from a single level of taxation. Before you form a partnership, make sure you and your partner outline how responsibilities will be distributed.
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Research credit: Amanda Moore, law student, The University of Akron