This article is written as a followup to my article on Starting a Small Business. A partnership is another business structure for small businesses. In exploring possible options for your business, check out the Starting a Small Business article for more information.
“What about a partnership?”
Like a sole proprietorship, a general partnership doesn’t require any filing formalities with the state. In fact, a general partnership can be formed on accident. If you start engaging in any sort of business activity with someone, even without the intent to form a business relationship, you may have started a general partnership. A general partnership is an association of two or more persons who are carrying on as co-owners of a business for profit. Sharing profits creates a presumption of a partnership. A partnership can include two or more people.
The downside of a general partnership is that partners are personally liable for ALL of the debts of the partnership. Even if one partner is unaware that another partner is taking on debt, the unaware partner is still liable for that debt. Furthermore, each partner is liable for the accidents of the other partners. If one partner, during the course of operating the business, is negligent and damages someone or something, the other partners are liable for that damage.
How to limit liability in a partnership.
The personal liability of a general partnership lead to the creation of Limited Partnerships and Limited Liability Partnerships. A Limited Partnership is made of at least one general partner and one limited partner. To form a Limited Partnership, you must file formation documents with the state. The general partner is liable for the partnership obligations and is generally understood to manage the business. The limited partners are not liable for the obligations of the limited partnership. Further, in states that have adopted the Revised Uniform Partnership Act, a limited partner can engage in the managing of the business without forfeiting their protection from personal liability.
A Limited Liability Partnership (LLP) is a legal entity that also requires formation by filing an Amendment to Certificate with the state. An LLP must also file annual reports. The most important element of an LLP is that no partner is liable for the obligations of the LLP.
If you believe that a partnership, whether general, limited, or limited liability, is a viable option for your business, I recommend talking to an attorney. An attorney can help protect you and your business so that you can focus more on your business and less on legal issues!
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