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What Are the Options for Structuring a Business as a Partnership?

 Posted on July 04,2024 in Business Law

Broward County, FL business partnership lawyerWhen starting a business, it is important to carefully consider how the business will be structured. This decision can impact many different aspects of the business, including how it will be managed, how important decisions will be made, what responsibilities apply to an owner or others involved in the business, and who will be liable for business debts.

For a business with multiple owners, determining which options to use when establishing a business partnership can be a complex matter. If you are starting a business along with one or more partners or bringing new partners into an existing business, an experienced attorney can help you understand possible business structures. Your options for structuring your business partnership may include:

General Partnership

A general partnership (GP) is the simplest form of partnership. A partnership is similar to a sole proprietorship, except it has two or more owners. Partners will agree to share all business assets, profits, and liabilities. Advantages of this option include:

  • Ease of formation: Establishing a GP is straightforward and involves minimal paperwork.

  • Direct control: Partners will have equal control over business operations and decision-making.

  • Tax benefits: Profits and losses pass directly to partners, avoiding corporate taxes

A general partnership also has certain disadvantages, including:

  • Unlimited liability: Since there is no separation between business assets and the partners’ personal assets, they will be personally liable for business debts and obligations.

  • Mutual agency: Unless there is a partnership agreement stating otherwise, each partner can bind the business to contracts and obligations without the others' consent.

  • Difficulty in transferring ownership: The process of selling a partnership may be more complicated, since each partner will have a stake in the business’s assets. This may make it difficult for one partner to leave the business or sell their share of the business to a new partner.

Limited Partnership

In some cases, partners may wish to be involved in a business while having less responsibility or control over day-to-day operations. General partners may be more closely involved in managing the business, while limited partners more often invest in the business and have some involvement without fully participating in the management of the business. Advantages of this option include:

  • Limited liability for limited partners: While general partners will still have unlimited liability, the liability of limited partners will be restricted to the amount they have invested in the business.

  • Attracts investors: The structure may provide investors with the ability to become partners in a business without concerns about liability.

  • Flexible management: General partners will typically be able to retain full control over business decisions.

The disadvantages of limited partnerships include:

  • Unlimited liability for general partners: A business’s founding partners or others who are classified as general partners will remain personally liable for business debts.

  • Complex formation: Establishing an LP requires more documentation and regulatory compliance than a GP.

  • Limited control for limited partners: Investors may not be able to participate in business decisions or be involved in determining the direction of the business.

Limited Liability Partnership

With a limited liability partnership (LLP), all partners will have limited liability protection, shielding them from personal responsibility. The advantages of this type of structure include:

  • Limited liability: Partners will not be personally liable for the business's debts or other partners' actions.

  • Flexible management: Partners can manage the business directly without the liability concerns of a general partnership.

  • Pass-through taxation: Profits and losses will be passed through to partners and taxed as part of their personal income, avoiding corporate taxation.

LLPs may have disadvantages such as:

  • State regulations: LLPs are subject to state-specific regulations and compliance requirements.

  • Potential self-employment taxes: Partners may be subject to taxes that cover costs related to Social Security and Medicare.

  • Formation costs: Setting up an LLP can be more expensive than forming a GP or LP due to the legal requirements.

Limited Liability Company

A limited liability company (LLC) combines the benefits of limited liability with the flexibility of a partnership, making it a popular choice for many business owners. Multiple members may join an LLC, and an operating agreement can specify the rights and obligations of different members while also including details about when members may join or leave the company. Advantages of LLCs include:

  • Limited liability: Members are not personally liable for business debts.

  • Flexible structure: An LLC can be managed by its members or by appointed managers.

  • Tax options: An LLC can choose to be taxed as a sole proprietorship, partnership, or corporation, providing flexibility in tax planning.

Even though an LLC is often a very beneficial option, it does have certain disadvantages, which may include:

  • Formation and maintenance costs: Setting up and maintaining an LLC can be more costly than simpler types of partnerships.

  • Complexity: The flexible structure of an LLC can lead to more complex operating agreements and management arrangements.

  • Varying state laws: LLC regulations vary by state, which can complicate operations if the business operates in multiple states.

Contact Our Broward County, FL Business Partnership Lawyer

Choosing the right business structure is a critical decision that will affect your legal and financial responsibilities, your ability to manage the business effectively, your company’s future growth and development, and many other aspects of business ownership. At The Elliot Legal Group, P.A., our Oakland Park, FL business law attorney can help you determine the best structure for your business, and we will make sure you follow the correct legal procedures when establishing a new partnership or LLC. Contact us today at 754-332-2101 to set up a consultation and begin taking steps to achieve success for your business.

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