Free Enterprise - The FindLaw Small Business Law Blog

Choosing a Business Structure: the Partnership

Continuing our series on the types of business structures available to small businesses, today we'll look at the partnership. The general partnership is one of the oldest forms of joint business endeavor. Today, it has spawned several children, including limited partnerships, limited liability partnerships (LLPs), and even limited liability limited partnerships (LLLPs).

Some benefits of doing business as a partnership include:

  • Fewer formalities. Unlike corporations or limited liability companies, partnerships do not need to register their existence with the state. It is formed by a private agreement between the partners; and
  • "Pass through" taxation. The partnership is not taxed. Partners are taxes on profits and losses from the business, which they must report on their personal tax returns.

Some disadvantages include:

  • Personal liability. Unlike owners of corporations or LLCs, partners are personally liable for the debts and obligations of the business;
  • Joint authority. All of the partners can bind the partnership to agreements and obligations. All partners also have the same level of managerial power, unless the partnership agreement specifies otherwise;
  • Potentially limited duration. A partner's leaving, death or bankruptcy generally causes the partnership to dissolve unless such eventualities are not addressed in the partnership agreement;
  • Difficulty selling interests. If the partnership agreement does not spell out other procedures, nobody can become a new partner without the consent of all existing parties. This limits a partner's ability to sell their stake in the business.

To get away from some of these disadvantages, some states allow limited partnerships, in which general partners run the business and have full personal liability but limited partners are more like investors and have no liability beyond their investment.

Many states also allow limited liability partnerships (LLPs). Some states, such as California, restrict the use of the LLP format to professional fields such as law, accountancy and architecture. Partners in LLPs have joint authority, but limited liability for the claimes against the partnership. Some states, however, allow LLPs to limit partner liability only in claims of negligence against the partnership. In these states, partners in LLPs can be liable for contractual debts or torts beyond negligence committed by the partnership. LLPs must also register with the state and are subject to increased formality and often insurance requirements.

To further complicate the menu, there is the LLLP, the limited liability limited partnership. This is like an LLP (limited liability for all partners), except it has general partners running the business and limited partners acting more as investors.