Part One: Choosing the Right Entity for Your Business - Partnerships

One of the first decisions any business owner will make is what type of business entity to create. It is helpful, when making such a decision, to consider the liability protections and exposures as well as tax benefits and burdens that each type of business entity will offer. In this first part of our brief introduction to common types of business structures, we will discuss various types of partnership arrangements as well as the tax, liability and general considerations of each.

Partnerships

A partnership is a business structure in which two or more people or business entities own, contribute capital to and share in the profits of the business. There are various types of partnership arrangements.

General Partnerships

A general partnership exists when partners own, contribute capital to and share in the profits of the business equally. The entity is not taxed. Instead, all business income and losses are reported on the general partners’ personal income tax returns. This is known as pass-through taxation. With respect to liability, each partner can act on behalf of the partnership and legally bind the business and, in effect, all other partners to contracts, financing or debt arrangements and other obligations. Additionally, each partner is (i) personally liable and (ii) jointly and severally liable – meaning partners can be held individually or collectively responsible – for the debts and obligations of the business and the actions of other partners.

Limited Partnerships

A limited partnership is a business structure that consists of both general partners, who commonly manage the business, and limited partners, who may make capital contributions to the business but be uninvolved in management and operations. The partnership is not taxed at the entity level and partners are subject to pass-through taxation. General partners usually pay income and self-employment taxes, while limited partners pay income tax but not self-employment tax. While general partners are personally liable for the debts and obligations of the business, limited partners are usually only liable for the amount of capital they have invested in the business, and their personal assets are generally protected from liability for lawsuits, debts or other obligations of the business.  

Limited Liability Partnerships

A limited liability partnership is a business structure frequently used by licensed professionals such as lawyers, doctors and other medical professionals, accountants, architects and engineers. Usually, all partners have the right to directly manage the business. Generally, partners are not personally liable for lawsuits, debts and obligations in connection with the business or for other partners’ negligence or misconduct. Partners are subject to pass-through taxation.