Small Business Partnerships
What is a "general partnership"?
A partnership is very similar to a sole proprietorship, but just add more people. In other words, there's no distinct, separate, separately recognized legal entity. What a partnership is is anytime more than one person gets together and they're doing some sort of thing, whether its a business or its fixing up a car together or whatever, they are in a general partnership. A general partnership, both of the partners or any partner, if its more than two, can bind the company with a contract. For instance, if I were general partners with my best friend in an endeavor to start a new business, if my best friend went out and signed a multi-million dollar contract for telephone service, I as the other general partner and my entire partnership would be bound by that. And also, if for some reason our partnership was sued, both individuals are sued together, and if one person, lets say myself, I didn't have any money and couldn't satisfy a judgement, the entire judgement would have to be satisfied by the other partners. So what that means is all partners have unlimited liability for debts and credits, creditors of the company, and additionally, all of the partners are responsible for the income, so when income comes in, its split among the partners equally according to their proportion. Now, with the general partnership you can get a little bit more creative and help to make it a little bit more legally efficient and that is by signing a partnership agreement, something that typically a lawyer would do or you'd go to a lawyer and have them draw up, as to what everyones rights and responsibilities were in a partnership.
What are the pros and cons of forming a general partnership?
The pros and cons - I think that the pros, first off, are very similar to the pros for a sole proprietorship. As soon as you get together with a friend and say, "Let's do this," and you start doing a business, you have one. You have a general partnership; you don't need to sign an agreement, you don't need a lawyer, you don't really need anything; all you need is an idea and a little work behind it. The cons, also very similar to the cons for a sole proprietorship, are in that every single partner has unlimited liability; every single partner's responsible for debts. If someone sues that business, both or all of the partners could end up being bankrupt, and each of their houses could be seized. Any assets that they own could be seized. The one additional con that you have with a general partnership that you don't have with a sole proprietorship is the fact that any partner or any of the general partners can bind the business in a contract just by talking with a vendor. Someone could call up and say, "Hey, we'd like to sell you this new device, or this new thing", and if someone says, "Done - I want it," the entire business including the other partners who didn't even vote for it are responsible for it.
What is a "limited partnership"?
A limited partnership is different than both the sole proprietorship and a general partnership, in that it is a separate legal entity - it's filed with the state. What a limited partnership is, is one general partner. That general partner has unlimited liability for debts and assets and everything, and is responsible for running and the operation of the company, and all of the limited partners that are along with the general partner, are typically passive investors. For instance, a lot of film productions are limited partnerships, a lot of venture capitalists and people who do passive investing are limited partnerships. Real estate companies typically can be limited partnerships. The reason why this is is there's usually one person, and by the way, a general partner of a limited partnership can even be an entity, like a limited liability company or a corporation, so that way even though the general partner has unlimited liability, if it is a separate structure, a lot of times it will still enjoy, the individual owners will enjoy a certain type of limited liability.
What are the pros and cons of forming a limited partnership?
Limited partnerships offer each of the limited partners (in other words, not the general partner) limited liability, as long as that limited partner doesn't actively participate in the management of the company. This means that if a limited partner, for instance, only owned one or two percent of the company, and there was a judgement against it, they would only be liable to the actual amount that they had invested, and not for more. Additionally, it's a separate legal entity, unlike a regular general partnership, so that it can open up a bank account in its own name; it can conduct business and own property, and things like that, in its own name, and not in any one individual name. Some of the disadvantages, however, of a limited partnership are that the general partner still has unlimited liability; so unless the general partner is formed as its own separate company, that individual (if it is an individual) would be subject to all the debts and personally liable, even, for some of the debts of the company. Additionally, I think that there can be some issues surrounding how the limited partnership is run. In other words, if you want more people and some of these limited partners to actively participate in the company, a lot of times some of them would be reluctant to do so, because of the liability issues.
What is the difference between a general partnership and limited partnership?
A limited partnership is, as it says, it has limited partners. That's the big difference. Every general partnership, each one of the partners, whether there's two or two hundred, is a general partner. Each one of those general partners has unlimited liability when it comes to debts of the business or liabilities of the business. For limited partners, however, as long as they don't participate in the active management of the company, they're only liable up to the amount of their investment, or the percentage of their investment. So if a lawsuit occured for a general partnership, each one of the partners could be sued for the entire amount. Whereas in a limited partnership, which is also a separate legal entity, only the limited partners--again, as long as they don't participate in the management of the business--their liability will be limited, which is very good and it actually helps get passive investors in to a company.
