When you are starting a small business, you have three basic options when it comes to the legal structure – to have a sole proprietorship (where you will be the sole owner), an organization, or a legal partnership. To make a decision regarding the type of legal structure, there are certain factors that you need to take into account:
- The number of employees that you plan to have.
- The tax advantages that you might receive for a particular type of legal structure, according to various federal and local laws.
- The tax disadvantages that you might face due to a particular structure.
- The number of years that you plan to be in the business.
- The type of business that you expect to start.
- Various legal restrictions that might be placed upon you, and assumed liabilities.
- The amount of capital needed, as well as the distribution of earnings.
If, after considering all the factors, you decide that a partnership is the way to go for your small business, then there are two types of legal partnerships that you can form.
A general partnership is when two or more people come together to start a business via an oral agreement. You may both be friends and business partners; still, it is strongly recommended to get an attorney to draw up a legal partnership agreement. In such a partnership arrangement, all the partners are liable for all the legal actions by or against the company, as well as the debts of the business.
To have a legal existence, a general partnership should be created by creating proof of existence and an agreement.
The partnership agreement, drawn up by an experienced business attorney, should clearly specify the type of business, the equity invested by each partner, division of profit and loss, each partner’s compensation, division of assets on dissolving the business and the term of partnership. It should also include any provisions for changes or dissolving the partnership and any settlements to be reached if one or more partner dies or becomes incapacitated.
These things, if incorporated in the legal agreement, can help avoid conflicts at a later stage, and make any transition or dissolution much smoother.
A limited partnership is very similar to the general partnership, except for the limited involvement of one or more partner in the business, and thus a limited liability on their part. The liability of the limited partners is only up to the extent of investment, and they can be not made to face unlimited liability. This is because limited partners do not have any authority in the day-to-day management of the company, and only stay as invested partners (or silent partner, if you will).
Limited partners have to specify to state and federal authorities that they are only limited partners, in order to escape unlimited liability. These partners cannot bind the business to any agreement unless the managing partners expressly give them that power.
In this case too, it is important to hire a good lawyer to draw up a good agreement, where each partner understands their position in the business.