Advantages and Disadvantages of Partnerships

Choosing the right type of business management structure when registering a business is especially crucial to operating a successful business, because it can have a substantial impact on the future of the company.

There are a number of different business management structures that new business owners can select from, which will be further discussed below. Depending on which business management structure that a new business owner uses when registering their company, it can have far-reaching consequences.

An example of this would be how some business management structures require that its owners comply with certain formational rules, such as if you were to create a limited partnership. The rules for a limited partnership demand that there be at least one general partner assigned to manage the entire business, and at least one limited partner to continue operating as a lawful limited partnership.

The business management structure can also dictate things such as:

• How much money business owners can collect from investors;
• The number of members who are allowed to sit on a company board; and/or
• The way in which the business will be taxed.

Some of the factors that a new business owner should consider when selecting a business management structure include:

• The number of owners that are forming the business;
• Whether they want the ability to issue stocks and raise money from investors;
• Both federal and state tax laws in order to evaluate the tax incentives that each business management structure offers;
• How much control the owner wishes to have over company decisions and assets;
• The amount of money that the owner is willing to spend in order to register their business; and/or
• The potential risks and liabilities that they are willing to incur both personally and professionally. An example of this would be how a person who wants to protect their personal assets from creditors should choose to form an LLC.

New business owners should also consider:

• Wind-up or termination procedures;
• The rights that they want to possess should they decide to sell or expand on the business; and
• Their comfort level in terms of having company details exposed to the general public.

What Are The Different Types Of Business Management Structures?

The most common business management structures can be found on the U.S. Small Business Administration (“SBA”) website. However, because the type of business management structure also dictates how a business will be taxed, less common alternatives can be found under specific state business laws.

Some of the most popular types of business management structures include:

• Sole Proprietorships: Sole proprietorships are businesses that can be formed by a single owner. While it does not need to be registered with the state, they are easy to set-up should the owner choose to do so. The lack of paperwork and minimal procedural requirements make sole proprietorships a simple and inexpensive option.
  • Because there is only one owner of a sole proprietorship, they are solely responsible for taking care of all management aspects of the company. Additionally, sole proprietors can be held liable for any risks or liabilities that are incurred by the business;
• Corporations: A corporation is a legal entity that is regulated by state law. Because it is considered to be separate from its owners, meaning the shareholders, only the corporation itself can be held liable for debts and liabilities. There are many different types of corporations, and each type is classified according to specific factors such as their purpose, the number of shareholders, the amount of stock to be issued, and their overall tax structure;
• General Partnerships: While there are four different kinds of partnerships, a general partnership is the most popular option for new business owners. It is generally formed by two or more people who wish to be co-owners of a for-profit business. What this means is that as long as both parties intended to make money from a product or service that they offer, they are considered to have entered into a general partnership.
  • General partners can be held both individually and jointly liable for any losses or debts incurred by the partnership. Additionally, they can be held liable to the other partners if they breach their fiduciary duty to the business, as well as to third parties;
• Limited Partnerships: A limited partnership has considerably stricter requirements than a general partnership. To reiterate, limited partnerships must contain at least one general partner to oversee and manage the company, as well as at least one limited partner. As such, limited partners will have limited authority over this type of partnership and can only be held liable to the extent of their investment. Similar to general partnerships, the general partners in a limited partnership can be held both jointly and individually liable for company debts and risks;
• Limited Liability Partnerships: Limited liability partnerships provide its partners with the same obligations and financial rights as those that are found in general partnerships. However, the partners are required to register the business with the state. Additionally, while limited liability partnerships offer the benefit of being free from the debts and liabilities of other parties and the partnership itself, each partner will remain liable for their own actions or any conduct that they personally supervise or demand;
• Limited Liability Limited Partnerships: This is one of the rarest forms of business management structures because these organizations are not recognized by every state, and they can only be formed in compliance with a state statute. In states in which they are recognized and available, they are generally chosen for tax purposes. These structures have similar requirements to those of limited partnerships, but with one defining exception: general partners cannot be held personally liable under this formation; and
• Limited Liability Companies: Limited liability companies combine the tax arrangements and management styles that are used in partnerships, with the liability benefits found under a corporation. As such, members of a limited liability company cannot be held responsible for debts that are incurred by the business. Additionally, this structure allows members to choose how they wish to be taxed.

What Are Some Of The Advantages And Disadvantages Of Partnerships?

To reiterate, a partnership is a legally-recognized business entity composed of two or more people, each of which holding equal ownership in the business. Partnerships are commonly created by formal written agreements, but may also exist on less formal terms. Additionally, laws for creating a partnership may differ from state to state.

In a general partnership, each partner is generally jointly responsible for losses and violations associated with the whole partnership. However, in a limited partnership, general partners are still held liable for everything while limited partners enjoy limited liability.

Partnerships can offer many different advantages, including:

• Control: Partnerships generally allow for a greater amount of control by the partners than would be possible in a different business management structure, such as a corporation;
• Taxes: The partnership as an entity generally does not file taxes. Rather, each individual files their own taxes. This may be especially desirable for smaller organizations;
• Survival of the Partnership: A partnership will generally terminate or dissolve if any of the partners becomes deceased or incapacitated; and/or
• Creation: Partnerships are generally easy to create, and will require less paperwork than other types of business management structures.

However, some of these characteristics of partnerships can work against certain business goals. An example of this would be how if the parties wish for the organization to extend beyond the life of a partner, a partnership may not be the best business form because the partnership will dissolve upon any partners’ death. An example of this would be how if the members would like more restrictions on the way their business is controlled, they might choose a more traditional corporation structure.

One of the defining limitations of a partnership would be that they can limit the growth of the business. This is because control is localized into only a few individuals, as opposed to members of a board or similar corporate features. As such, they are more suitable for smaller start-up ventures and temporary projects.

Do I Need A Lawyer To Set Up A Partnership?

You should hire a qualified corporate lawyer in your area if you need help choosing a business management structure, such as a partnership. An attorney can help you understand which would be the best choice for you, and will also be able to represent you in court, as needed, should any legal issues arise.