When it comes to forming a business with one or more partners, you can set up a structure that best suits your needs. The decision you make will be based on how you and your partners want to approach the business. Here are a few different kinds of business structures that you might consider.
General partnership
Under a general partnership (GP), you and your business partners will effectively be the business. This has advantages and disadvantages.
Pros:
- Easy to continually invest: Because a general partnership does not separate the business from the vested partners, this structure allows you to use personal finances to fund your company.
- Simplified taxes: With a GP, business revenue will be taxed as income for each individual partner.
Cons:
- Unlimited liability: Each partner assumes unlimited liability for the debts of the business.
- Rigid partnership structure: Adding new partners can be difficult with a General Partnership. You will likely have to value all the partnership’s assets to add a future partner.
Limited partnership
A limited partnership (LP) is another kind of partnership structure. However, with an LP there is a little bit more flexibility in the partnership. Under an LP, management duties rest with general partner(s), while limited partners are allowed to make investments in the company.
Pros:
- More access to capital: With an LP, you may be able to bring on more limited partners into the business. This can give you more access to capital.
- General partner(s) retain full oversight: You as a general partner still retain full control of the day-to-day operations of the company.
Cons:
- General partners’ liability: As with a GP, general partners under a limited partnership structure still assume all the liability for the company and its debts.
- Additional compliance requirements: Limited partners are effectively investors in your company. Thus, you must hold annual meetings and detail the terms of limited partnerships.
Limited liability company
A limited liability company (LLC) differs from a partnership, because it is a separate entity that is registered to the state. The biggest difference between an LLC and a partnership is that an LLC offers some liability protection.
Pros:
- Liability protection: Because an LLC is a separate entity, the proprietors of a business are protected from unlimited liability. This is generally the most attractive feature of an LLC.
- Pass-through taxation: In most cases, an LLC will also not pay its own taxes. This means that the IRS treats an LLC like a partnership for tax purposes.
Cons:
- More complicated finances: An LLC’s main drawback is that it requires you to keep personal and business finances separate. This may make financing your business less convenient.
- LLC termination: If one of the partners leave an LLC, it ceases to exist.
Bottom line
Which structure you select will be dependent on your business and preferences. An experienced business attorney can help give you detailed advice about different business structures and help you properly register and set up your company.