Forming A Partnership to Organize Your Business

Forming A Partnership to Organize Your BusinessWhile true partnerships are not as common these days as limited liability companies, they do make sense in some circumstances. They come in a three main varieties.

  • General partnerships are the traditional kind. Unless the general partnership agreement provides otherwise, all partners share equally and have equal control. All partners have unlimited liability for the debts and obligations of the partnership. People can create a general partnership by agreeing that they are general partners. They do not need to file anything with the state to create the entity (as with all these entities, tax filings and business permits are a different matter).
  • Limited partnerships have at least two classes of partners: the general partner and the limited partners. The general partner has almost all the control and unlimited liability, but usually has a small piece of the pie. In order to protect the assets of the individuals involved, the general partner is often a corporation set up especially for this purpose. The limited partners rely on the general partner to manage the business and often have a larger slice of the pie. Their liability is generally limited to the amount they invest. The limited partnership agreement describes, among other things, how money is divided up and how much say the limited partners have in major business decisions. Unlike general partnerships, LPs are creations of statute. In order to form one, one must file with the state and then should have a limited partnership agreement on top of the state filing.
  • Limited Liability Partnerships are designed for professional service firm partnerships, like accounting firm partnerships or law firm partnerships. They combine elements of a general partnership with the limited liability of limited partnerships. While many professional service firms are now being organized as limited liability companies, LLPs can still make sense for some. Like LPs, LLPs require one to file with the state, and possibly with a regulatory body for the profession.

Partnerships are usually considered “pass-through” entities for tax purposes.  This means that the net income or net loss is passed through to the individual partners, instead of the entity paying a tax like a corporation does, then paying out a dividend on which the owners get taxed a second time. Whether this makes sense for you depends on your particular situation.  Taxation, control and protection from liability drive the decision how to organize your business.

If you are in Massachusetts, a partnership lawyer in Massachusetts can help.