The Small Business Partnership: General and Limited Partnerships

Starting a small business is an exciting venture for entrepreneurs. One big decision to make is the type of business structure to choose. While some may choose a sole proprietorship, others may find partnerships appealing. In a business partnership, business owners come together to share responsibilities, risks, and benefits.

There are several different types of partnerships with various advantages and disadvantages. The business structure you choose will depend on your business preferences and your need for liability protection. This article provides an overview of business partnerships in America.

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Partnerships: A General Overview

A partnership is a business entity where two or more people own the business together. Unlike incorporating, which creates a separate legal entity, a partnership is not a separate legal entity from its owners. In many ways, it's like a sole proprietorship, except with multiple business owners involved. There are several types of partnership structures that entrepreneurs can consider for their startup:

• General partnerships (GPs)
• Limited partnerships (LPs)
• Limited liability partnerships (LLPs)
• Limited liability limited partnership (LLLPs)
• Joint ventures

These business structures are similar, but they should not be confused. They offer very different liability protections and other benefits. The rules and filing requirements also vary by state. You should check your state's laws or consult a local business attorney to see what partnerships are available to you. To understand partnerships, it helps first to understand general and limited partners. Let's explore each of these types of partnerships in more detail.

General Partnerships

A general partnership (GP) is the simplest form of partnership. This is because they are the most accessible to form. They do not require registration or a lot of paperwork. Here, all partners share the decision-making, profits, and business debts equally. This is true unless the written partnership agreement specifies otherwise. Partners are all personally liable for the business's obligations in a general partnership. So, your personal assets could be at risk if someone sues your general partnership. This is one of the significant drawbacks of the general partnership business structure.

Each partner can act on behalf of the business. This makes it essential to trust one another. You should only go into a general partnership if you have a trusting business relationship with your partners. You could be liable for their mistakes and poor business decisions, so choose your general partners carefully.

Limited Partnerships

In a limited partnership (LP), there are two types of partners: general partners and limited partners. General partners manage the business and are personally liable for the partnership debts. So, if someone sues the business or tries to collect on its debts, the general partners' personal assets can be at risk.

Limited partners, in contrast, only contribute capital and share in the profits. Their liability is limited to their investment in the business. They are considered silent business partners and do not participate in the business's day-to-day operations. Limited partners should be careful not to begin managing the day-to-day business activities. If they do, their personal assets could be at risk, too.

Limited Liability Partnerships

A limited liability partnership (LLP) is different from an LP. LPs must have a general partner who has unlimited personal liability. However, in an LLP, all partners have limited liability. This is like the limitation of liability that a limited liability company (LLC) offers.

However, this limitation can vary by state. Some state laws give limited liability to LLP partners for all business obligations. In other states, partners only receive limited liability for the other partners' negligence.

In some states, only certain types of businesses can form LLPs. They are usually allowed for professionals like attorneys, architects, and accountants. LLPs make sense for those professions because bringing in and releasing partners is easy. It allows them to pool their resources and maintain flexibility in the partnership structure. It also allows all the partners to manage the business with limited liability.

Limited Liability Limited Partnerships

A limited liability limited partnership (LLLP) is a newer form of partnership. It also offers a different spin on liability protection for partners. An LLLP has at least one general partner and one limited partner. In LLLPs, all partners, even the general partners, have liability protection. This contrasts with an LP, where the general partner assumes unlimited personal liability. The limited partners in LLLPs are silent partners, like those in LPs.

The difference between an LLP and an LLLP is that an LLP does not have limited partners, and an LLLP does. LLLPs are common among real estate investors. It allows them to limit their financial liabilities even if they get involved in the business's day-to-day operations.

LLLPs are not recognized in all states. You should check with your secretary of state to see if it is available where you do business. If you do business in many states, you should opt for a different business structure.

Joint Ventures

Many people think of a joint venture as a partnership. However, two or more parties join a joint venture for a specific business project. Unlike most partnerships, joint ventures are devoted to a defined objective. A typical partnership, on the other hand, usually has a more long-term outlook.

The parties in joint ventures are often businesses. Through the joint venture, the companies can combine their strengths to go into a new line of business or research. They also use joint ventures to break into new geographical markets.

Joint venture members govern themselves with a contract between the members that spells out their responsibilities and liabilities. They can choose any legal structure, including a partnership or a corporation. When the joint venture's project or purpose is complete, it usually dissolves.

Partnerships Overview

Partnerships come with varying forms of liability limitations, and they can be easy to confuse. For a quick overview of the different forms of partnerships, see the table below.

Partnership Agreements

All partnerships should have a written partnership/operating agreement between partners. This contract can help to safeguard against future disputes. It should give a detailed explanation of:

• How to distribute profits
• The partners' responsibilities
• The partners' powers to make business decisions
• A dispute resolution clause
• How the partnership can bring in a new business partner
• A buyout agreement
• An exit strategy. The partnership agreement should contain a detailed description of how partners can withdraw. It should also specify how much notice they need to give. This provision should also include details on how the partnership will handle a partner's death or retirement
• Any other issues that are important to your business

Without a partnership agreement, your state's default partnership rules will govern. These default rules might not be appropriate for your type of business. A good partnership agreement allows you to operate your business as you see fit.

Liabilities to Creditors

Probably the most important thing to know about partnerships is that owners are personally liable for all of the partnership's obligations. Creditors can go after the partners' personal assets, including bank accounts, cars, and homes. It is a frightening proposition and is the main drawback to partnerships.

There is an exception to personal liability in limited partners who have only invested money into the partnership. Limited partners must file a limited partnership certificate that includes the names of all general partners. Without filing this document, even if all parties intend to have general partners who run the business and limited partners who only invest money, the limited partners may still be personally sued by creditors.

Creditors can collect any debt owed from a single partner. The legal term is "joint and several liability." It means that each partner is individually responsible for the entire debt. It's a legal method that prevents passing the buck between possible defendants (or partners). Of course, if one partner does end up paying for the entire debt, they can sue the other partners to collect their fair share.

Responsibilities to Other Partners

As in any legal relationship, you owe specific duties and bear responsibilities to your partner(s). These responsibilities include:

• A duty of loyalty and fiduciary duty
• Equal profit sharing (unless there's an agreement that says otherwise)
• Equal control and no salary (unless there's an agreement)

The fiduciary duty and duty of loyalty that all partners owe each other means a partner must act in the partnership's best interest. They can't act primarily to enrich themselves.

Partners must provide a proper financial accounting of their actions, and the partnership can sue individual partners for any financial wrongdoing.

Partnership Taxes

For tax purposes, a partnership has the advantage of being a pass-through entity. This means the partnership itself does not pay taxes. Like sole proprietors, the individual partners pay taxes on their share of profits. They do this through their personal income tax returns.

In other words, because the partnership isn't a special corporate entity (like an LLC), partners pay taxes on profits through their personal income tax. The partnership reports its profits to the IRS (though it doesn't pay taxes on them) so the IRS can be sure it collects the proper amount.

Businesses sometimes choose partnerships instead of corporations because of pass-through tax status. Corporations can be subject to double taxation. Double taxation is when corporations pay corporate taxes, and shareholders also pay taxes on dividends.

Terminating a Partnership

Without a written agreement, a partnership ends when a partner gives notice of their express will to leave (called dissociation). Terminating a partnership is more of a process than a single moment. A business generally needs to be wound down (i.e., pay debts and fulfill obligations).

When there's a written agreement, the partnership ends when an event outlined by the agreement occurs or when a majority of the partners decide to end the partnership after a single partner dissociates. Leaving a partnership is fairly easy whether there is a written agreement or not. You'll still be responsible for obligations that the partnership incurred while you were there.

How a Business Organizations Lawyer Can Help

The laws that govern partnerships are subject to change and vary by state. If you have questions about the partnerships available, call a business organization attorney today.