If you are like so many other people who own small businesses with others, you probably aren't fond of paperwork. You would rather be in the trenches doing the work. For this reason, and others, you may have already agreed with your partners that forming a complicated business entity just isn't necessary.
You may be aware of partnerships but don't really understand the differences between a general partnership, a limited partnership and a joint venture. Before deciding which way to go, it would probably help to have some information about each type of partnership so that you can make an informed decision.
What's the difference between the three?
The primary difference between general partnerships, joint ventures and limited partnerships is liability and responsibility. The most commonly formed is the general partnership. Under this structure, each partner assumes the liability for all of the company's debts and shares in all of the company's profits. The only difference in a joint venture is that the partners come together for one specific business purpose such as one project and then go their separate ways.
In a limited partnership, the general partner role remains the same, but limited partners invest money in the business, do not participate in the management of the business and only incur liability according to their investment percentage.
Tell me more about general partnerships
A general partnership may sound attractive to you since everyone involved takes on the same responsibilities and liabilities. Each of you takes the same risks and reaps the same rewards, but what does that mean? Consider the following basic principles in absence of a written agreement that states otherwise:
- Duties: Each partner owes a fiduciary duty to the others. You share equally in the profits and the control of the company.
- Creditor liability: Each partner owes the full amount of a debt to a creditor. For example, if you take out a loan and default on it, the creditor may seek the full amount of the loan from each partner. The legal term is "joint and several liability." If the creditor collects the full amount from you, you may file a lawsuit against the other partner or partners for their share of the debt.
- Taxes: Each partner pays taxes on the business's profits on their individual income tax returns. The return filed by the partnership is for reporting purposes only.
- Termination: If you decide to leave the partnership at some point, you need only provide express notice to your partner or partners. You remain on the hook for any business dealings and debts from the time before you left the partnership, and it can take some time to actually separate yourself from the business.
General partnerships are fairly straightforward and work well for many businesses. If you choose this type of entity, you may want to consider entering into a written agreement to provide further protections for everyone involved. This action is not necessary but makes good sense.
Take advantage of legal resources
More than likely, you still have questions regarding forming a partnership and want to know whether it would be the best option for your business purposes. You want to make the best decision possible and make sure that you are protected as much as possible as well. It may be beneficial to take advantage of legal resources in your area of New Jersey to make that happen.