What happens if one partner wants to leave the partnership?
Before you go into business together, you and your partners should decide what will happen to the partnership when one partner retires or dies, or wants to leave the partnership for some other reason, such as a divorce or bankruptcy. You might feel like you’re being overly cautious or pessimistic, but it almost always makes sense to include “buy-sell” provisions in your partnership agreement to deal with these issues. It’s the best way to prevent resentments and serious problems (including messy lawsuits) from cropping up later on.
What are the differences between a partnership and a limited liability company?
When two or more people go into business together, they’ve automatically formed a partnership; they don’t need to file any formal paperwork. By contrast, to form a limited liability company (LLC), business owners must file formal articles of organization with their state’s LLC filing office (usually the Secretary or Department of State) and comply with other state filing requirements.
Aside from formation requirements, the main difference between a partnership and an LLC is that partners are personally liable for any business debts of the partnership–meaning that creditors of the partnership can go after the partners’ personal assets–while members (owners) of an LLC are not personally liable for the company’s debts and liabilities.
There is one similarity between LLCs and partnerships, however. They both offer “pass-through” taxation, which means that the owners report business income or losses on their individual tax returns; the partnership or LLC itself does not pay taxes.
What is the difference between a general partnership and a limited partnership?
Usually, when you hear the term “partnership,” it refers to a general partnership–that is, one where all partners participate to some extent in the day-to-day management of the business. Limited partnerships are very different from general partnerships, and are usually set up by companies that invest money in other businesses or real estate.
While limited partnerships have at least one general partner who controls the company’s day-to-day operations and is personally liable for business debts, they also have passive partners called limited partners. Limited partners contribute capital to the business (investment money) but have minimal control over daily business decisions or operations.
In return for giving up management power, a limited partner’s personal liability is capped at the amount of her investment. In other words, her investment can go toward paying off any partnership debts, but her personal assets cannot be touched–this is called “limited liability.” However, a limited partner who starts tinkering with the management of the business can quickly lose her limited liability status.
Doing business as a limited partnership can be at least as costly and complicated as doing business as a corporation. For instance, complex securities laws often apply to the sale of limited partnership interests. Consult a limited partnership expert if you’re interested in creating this type of business.
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