Partnerships

PARTNERSHIPS

GENERAL and LIMITED

Advantages and Disadvantages

Small Business Partnerships

The Missing Piece

Partnerships Can Bring Some Potential Problems

So Plan Carefully

 

If you have other partners in your business, you cannot organize as a sole proprietorship, but instead you become a partner in a partnership. Of course, you do have other options available and we strongly suggest you investigate the other options on this website.

A partnership is much like a sole proprietorship except that there are two or more owners.

 

There are two types of partnerships –

General and Limited

GENERAL PARTNERSHIP

Set up with all partners having equal control and equal liability.

Advantages:

  • No double taxation (as in a C-Corporation)
  • Low start-up costs
  • Simple to set up
  • Right to select partners
  • Additional personal resources (managerial and financial)
  • Limited outside regulation

Disadvantages:

  • Divided authority (divided decision-making)
  • Costs are slightly more than sole proprietorship
  • All profits taxed as personal income
  • Difficult to find suitable partners
  • Structure that makes it difficult to obtain institutional financing
  • Lack of continuity in event of death or disability of a partner
  • Unlimited liability for all partnership obligations and all partners
  • Sharing of profits with partners

LIMITED PARTNERSHIP

Set up with at least one general partner who has general liability for the debts of the partnership. This structure permits investor involvement with liability limited to the amount of each investors investment only, or the amount agreed upon in the limited partnership agreement. The General Partner usually manages the business. The limited partners usually exercise no control over the business but are merely investors in the partnership.

Advantages:

  • General partner maintains control of the business
  • Can secure capital investment through limited partners
  • Limited partner can invest with limit on personal liability
  • Business not taxed directly

Disadvantages:

  • General partner has unlimited personal liability for the obligations of the business
  • More complex to set up
  • Limited partners have no control over the business
  • Lack of continuity in the event of the death or disability of the general partner

Written Partnership Agreement

It is very important to draft a written partnership agreement to clarify the operation of the business and avoid misunderstandings.

The agreement should include a list of the rights and responsibilities of each partner and their heirs, the management and continuity for the business in event of death or disability or one of the partners, the profit distribution plan, a buy-out agreement, expulsion or addition of partners, means for appraisal of assets, and any special conditions or arrangements that may affect any of the partners through operation of the business.

Register Your DBA

Registration of a DBA or Trade Name with the Secretary of State is a must.

We would suggest that you consult with an attorney that specializes in this field as these types of partnerships can be very complex.

We strongly suggest that you check out some of the other types of business entities that don’t have the liability problems of a partnership.

Partnerships General and Limited

See Business Structures

CONTINUED TO: Partnership Tax Strategy