Whether a business owner or consumer, you’ve most likely encountered the multitude of acronyms that follow your favorite brands and organizations – Co., Inc., LLC, LP, PC, PLLC, etc. Despite their brevity, these acronyms embody the important business and legal decision of entity selection. Selecting the right legal entity is of the utmost importance because each entity has different rules, regulations, and practical implications for business operations. This article will be the first in a three-part series on entity selection, with each article addressing a different legal entity. To kick off the series, this article sets out some things to consider when forming a general partnership:
Formation
The first obstacle to entity selection is the formation process. General partnerships are unique in that they can be formed without any formality. In fact, they can be formed entirely inadvertently. A
general partnership only requires “an association of two or more persons to carry on as co-owners a business for profit.”
Operation
The second consideration is determining how the general partnership will operate. Though not required, a partnership agreement can guide the entity by dictating matters such as ownership division, allocation of profits and losses, management decision-making, and partnership duration. If there is no partnership agreement, default statutory rules will apply. Because of the low barriers to entry and flexible management structure, general partnerships can be an attractive option for individuals hoping to start a business with minimal start-up costs.
Liability
The next major consideration is liability protection. Unlike other entities formed through formal filings with the state, general partnerships do not provide any form of liability protection. Without
liability protection the individual partners will be “jointly and severally” liable for the liabilities of and judgments against the partnership. In other words, the personal assets of the general
partners are potentially exposed to creditors and claimants of the partnership if the partnership’s assets are insufficient to satisfy the claims against it.
Tax
Another topic to address when selecting a legal entity with your attorney is tax. Unlike in corporations, there is no second layer of tax attributable to the partnership entity in the general partnership form. In general partnerships, the income and losses associated with the partnership’s activities “pass through” to the individual partners who will then have to report their proportional share of partnership income on their individual tax returns.
As 2021 comes to end, the COVID-19 pandemic continues to highlight the unpredictability of life and business. If you select the wrong entity for your business, there could be consequences in connection with your overall financial health. Luckily, with proper planning, you and your attorney can ensure there is a healthy amount of separation between your personal life and professional
endeavors.
Contact Alex at [email protected] to learn more about selecting the right entity for your business.