Partnerships And Limited Liability Companies

In business, a Partnership is the joining together of two or more persons for the purpose of owning and/or managing a common enterprise. Typically a general partnership will be co-owned and co-managed by several partners. This arrangement, known as a general partnership is relatively flexible and easy to operate, in that there are no requirements that a written partnership agreement be drafted or followed. Additionally, general partnerships are usually set up so that the owners co-manage the business, where for example one owner might handle company sales and marketing, while the other owner overseas the manufacture of goods or the provision of services to the clients.

General partnerships are also advantageously taxed, in that, like and S Corporation, each partner’s income or loss from the business “flows” through to them without any intermediate corporate tax payment. On the negative side of the tax ledger is the requirement that the partnership distribute it’s profits annually, leaving the company without retained earnings for further growth. Although the partners can certainly put more money into the partnership business for growth, they cannot leave their profits behind as a means of doing so.

Limited Partnerships, which require written partnership agreements to form, involve the establishment of a business whereby one or more partners are actively managing the business (managing partners) while other partners are passive investors without any operational responsibilities (limited partners). Limited partnerships are most commonly used in real estate ventures, or in the establishment of investor groups in the form of “hedge funds”. Like general partnerships, limited partnerships enjoy flow through tax treatment.

Now for the grim reality about partnerships-they create enormous risks for all partners. In a general partnership, the partners are fully liable for all acts or omissions of their partners. In other words, you can be liable for your partners malpractice, or you can be liable for your partners failure to fix a part which should have been replaced and caused a customer to lose a leg. These increased risks suggest that partnerships may not always present the best form of business entity. Although some or most risks can be insured against in a partnership-there are still many areas of exposure that mitigate against the use of this business form.

Limited Liability Companies, or LLC’s, which for the most part look and operate like a partnership internally, differ from partnerships because they have a “corporate shell” for liability risk around them. In other words, an LLC is a hybrid between the operational flexibility of a partnership, and the protective status of a corporation. LLC’s have several other unique features: for example they can be taxed as corporations or partnerships, and their profits and losses can be divided between owners irregardless of each owners percentage interest in the company. Obviously, LLC’s may become a major business form in the years ahead, due to their unique characteristics.

If your contemplating establishing a partnership, or a limited liability company, and want to steer clear of pitfalls along the way, we’re available to assist you. Call our offices at 858-793-1220 to schedule an appointment for a consult.

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Partnerships And Limited Liability Companies