Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
The initial choice you make with respect to business structure may carry wide-ranging legal implications. Prior to committing to a particular structure, it’s essential to thoroughly investigate the potential impact of each on your company. Despite having covered the various available structures in a previous article, I wanted to further examine the topic of partnerships with attention paid to each of the several sub-types.
Partnerships may be structured as general partnerships, limited partnerships, limited liability partnerships, or limited liability limited partnerships. If you suspect that a partnership may be an appropriate structure for your business, the information below should help to point you in the right direction with regard to type. (Note: Remember to discuss your business structure with an experienced business lawyer in order to make an informed decision on an appropriate structure.)
It’s important to note that a partnership may be comprised of more than two people. Limited liability companies (LLCs) are also eligible to be partnership members, not solely individuals.
Partners are expected to contribute to the business in a substantive way, whether financially or otherwise. Exactly what each partner contributes to the enterprise may vary between partners. For example, one partner may provide financial backing, while another partner is considered to be the “idea man.” For a partnership to work well, it’s important to have legal agreements in place which clearly state each partner’s role and responsibilities. This helps to provide clarity as to intent, ensure that everyone’s rights are protected, and serve as a legal document for reference should any issues arise.
General Partnership (GP)
The most basic partnership type is the general partnership. A general partnership includes two or more individuals or organizations equally sharing the rights and responsibilities of running the business.
A GP is easy to create. It doesn’t require a state filing and begins concurrently with business activities. While no specific paperwork is required, it’s a good idea to create a legal agreement outlining the terms of the partnership in order to ensure that each partner has a full and complete understanding of his role within the business.
General partners split any profits or losses equally and must reflect those figures on their personal income tax statements.
Limited Partnership (LP)
Whereas, in a general partnership, all partners are liable for the losses or debts of the business, in a limited partnership, only the general partner or partners have unlimited liability, while limited partners share limited liability. These limited partners are not involved in the day-to-day operation of the business. LPs must register in their state. Sometimes, in order to further reduce liability, the general partner is an LLC.
Limited partnerships are easier to establish than an LLC, however, the latter structure provides more legal protection for everyone involved.
Joint Venture (JV)
A joint venture may be similar to a general partnership in that two or more entities join together for business purposes. These entities are usually businesses which are working together on a particular project. They are each liable for the profits or losses of the specific venture, while still retaining their distinct business identities. The joint venture is dissolved once the project is complete. A JV requires legal documentation to detail each partner’s role and the specific terms of the agreement.
Limited Liability Partnership (LLP)
Limited liability partnerships are professional service businesses where the partners’ liability is limited with regard to business debts. However, partners are still liable for their own malpractice. Typical LLPs include law firms, medical practitioners, accountants, architects, and other professionals.
Limited Liability Limited Partnership (LLLP)
Some states permit the formation of a limited liability limited partnership, which is a designation similar to the limited partnership. However, whereas the general partner in a limited partnership can be held liable for the debts and responsibilities of the partnership, in an LLLP, their liability is also limited. Twenty-two states currently allow this designation.
There are arguments against the use of an LLLP. Because it’s a relatively new designation, there isn’t much applicable case law. If a general partner is concerned about the liability they face under a limited partnership, they have the ability to form an LLC to function as the general partner, thereby insulating themselves from liability. Some legal experts argue that this should be sufficient and that the LLLP designation is unnecessary.
To become an LLLP, the business must be registered. Some states require annual filing fees. If you’re considering this designation, ensure that your state allows the formation of LLLPs and verify the required paperwork and filing schedule.
Each of these partnerships is taxed in the same fashion. The business is required to send an annual K-1 form to each partner detailing that partner’s share of the income or losses. The business itself does not pay taxes. Each partner is responsible for paying taxes on his share of the income and may also deduct losses as appropriate.
If you think that a partnership may be appropriate for your business, give some thought as to which type may be best. Discuss your ideas with your potential partners and then consult a knowledgeable business lawyer.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.