A partnership is a business entity wherein two or more people are owners of a business. There are two types of partnerships:
- A general partnership (sometimes just referred to as a “partnership”)
- A limited partnership.
We’ll discuss the two types in more detail below, to help you determine which may better suit your small business needs.
There are no formalities required to create a general partnership, and you do not have to file anything with the Secretary of State’s office for your partnership to exist. A partnership is created by default when two or more people are owners of a business. In order to create a different business entity (i.e. Limited Partnership, LLC, or Corporation), you must file the appropriate paperwork and pay the necessary fees.
Under default rules, and without a partnership agreement stating otherwise, all partners in a general partnership have equal decision-making authority and they all have the authority to make legally binding decisions on behalf of the partnership. Similarly, all partners have unlimited liability, which means that a partner could lose more than his or her investment in the business, and thus his or her personal assets would have to be used to pay partnership debts. All partners are joint and severably liable for the debts in the business. This means that each partner is equally and 100% liable for any debts. This is a huge risk for partners to take, and leaves all partners vulnerable to the business’ debt. A partnership agreement is not legally mandated, but having one is strongly recommended.
Unlike general partnerships, limited partnerships require a partnership agreement, and the owners must go through a formal creation process. Another big difference is that a limited partnership has both general partners and limited partners. General partners have unlimited liability, like partners in a general partnership. Limited partners have limited liability; each partner’s liability is limited their investment in the company. This means that the most a limited partner can lose is the amount they’ve invested. Limited partners do not have much control in the management of the partnership, while general partners are responsible for running the business and have authority to make legally-binding decisions for the business.
In general, a limited partnership is a better fit for a small business than a general partnership, as it provides more protection for those involved. However, remember that not all partners in a limited partnership are created equal, and that their control over business decisions and liability to the business differ depending on the title of the position.
Interested in forming a partnership? Wondering if this is the right structure for you? G & G Law can help! Contact us today.