Are you a great team player? Can you make a marriage work? Do you recall telling your co-worker, friend or loved one, “let’s sink or swim together” ? If so, perhaps that idea or concept that you and another have been incubating over time is ready to take flight and evolve into a General Partnership. Whether you are considering pursuing a winery, restaurant, catering, event planning, bed and breakfast, wine based or hospitality business, the type of business structure you choose will be determinative of the potential tax and liability issues you will face. In my earlier posts in this series, we discussed the Sole Proprietorship business entity. In today’s post, we’ll consider three basic types of partnerships.
A general partnership is a business enterprise where two or more people co-own a business. Each person in the established entity is a “partner” who share fully in business’s profits and losses. Each has liability for the debts or obligations of the business. A partnership can be created based on a handshake, oral agreement, or by formal written agreement. Typically each “partner” can individually bind the business to a contract, business deal, or other third party actions that create liability for which the other partners can be personally held responsible. Thus, this kind of business arrangement requires a great deal of trust between the parties. (Think marriage vows !)
Although not legally required (an oral agreement will do) its wise for you and your other partners to consider signing a partnership agreement that identifies the rights and responsibilities of the partners. While organizing documents are not required by the Commonwealth, registration of a fictitious name ( a name different from your name and the name of your partner(s) is required in addition to publication of an advertisement in two newspapers in the county where your business is located.
A Limited Partnership is one that limits the liability of certain partners for debts beyond their partnership investment. A Limited Partnership is formed with at least one general and at least one limited partner. As an advantage, the limited partner is considered “passive” and is not personally liable for the management and actions of the partner(s) and does not participate in the management decisions. Conversely, the general partner can be held personally liable and has no such protections. Excepting the limited partner, legally a partnership is inseparable from its owners.
Limited Liability Partnerships
Both General Partnerships and Limited Partnerships may form a Limited Liability Partnership. The Limited Liability Partnership is a form of general partnership wherein state general partnership laws statutorily relieve the partners from all or part of their personal liabilities, debts, and obligations. A partner in an LLP may not be individually liable for the the misconduct or wrongful obligations of another partner. However, the partner may remain liable for their own actions, traditional partnership obligations and liability for those persons under their direct control. An LLP is created by filing a registration statement as specified by state statue.
A Partnership is easy to form as a business entity and offers a great deal of flexibility. A Partnership can end by the death, bankruptcy or withdrawal of the partner from the Partnership. Much like the Sole Proprietorship, the taxes of the business “pass through” to the partners. The partners pay income tax on their proportional share of the income based on their individual tax rates.
Are you ready to walk down the aisle (excuse me–path) to form a business Partnership? If so, a Partnership may be in your future. In the next post of this series, we’ll consider other forms of business structures.
What wine or hospitality business are you creating?