There are a variety of ways to structure the formation of a business. Partnerships and limited liability partnerships are two of the choices.
If you are currently running a business, you might be in for a surprise. If the business has two or more owners and no specific business entity has been formed, you are in a partnership! Why? Under long standing law, any business with two or more owners is automatically considered a partnership unless affirmative steps are taken to form the business as something else.
A partnership is a form of business that has great benefits and horrendous negatives. Personally, I believe it should be used sparingly as a form of business. Why? Well, a partnership provides no protection to its owners. If the partnership gets sued, all the partners are liable for the debt. This liability is total. If you only own 10 percent of the partnership, you can still be required to pay 100 percent of the debt if you are the one with money. For this sole reason, I believe partnerships should be avoided like the plague as a business entity choice.
So, why would anyone form a business as a partnership? In a word - taxes. Partnership entities do not pay taxes. Instead, the finances of the partnership pass down to the partners in accordance with their ownership percentages. It makes life easy from a tax perspective and avoids a lot of the complexities of business taxation.
So, is there any way to take advantage of the tax benefits of a partnership while avoiding the potential liability problems? Many people think a limited liability partnership is the answer.
A limited liability partnership is just like a general partnership with one big exception. The limited partners are shielded from personal liability. The "LLP" takes the following form. There is one general partner that actually runs the business on a day to day basis. There are then multiple limited partners that make capital contributions to the partnership in the form of cash, products and so on. If the LLP is sued, the general partner has no protection. The limited partners, however, can only lose their investment in the business.
So, why doesn't everyone just form a limited liability partnership? Well, the limited partnership position is really restricted. As a limited partner, you can not be involved in the running of the business. You are essentially limited to contributing capital to get the business up and running. If you don't like the way things are being done, there isn't a lot you can do. If a limited partner becomes active in the running of the business, he or she loses all protection from liability.
All and all, partnerships should be used sparingly. They can be excellent choices for very particular business situations. If you are considering this form of business, make sure to speak with an experienced business attorney so you know exactly what you are getting into.
