Builders and Contractors Exchange
Weekly Bulletin: 07 Jun 2004
What Type Of Entity Is Right For Your Business? Part 2 of 4: Partnership
By: Richard J. Crouch
This article is the second installment in a series of four articles that explore and compare the benefits and disadvantages of different types of business entities -- sole proprietorships, partnerships, corporations, and limited liability companies ("LLC's").
In the first article, we discussed sole proprietorships, the simplest form of business organization. In this article, we discuss partnerships.
There are two types of partnerships that you should be familiar with: (i) general partnerships ("GP's") and (ii) limited partnerships ("LP's).
The first we will discuss is the General Partnership.
Formation and Flexibility: GP's do not require any formal filing with the State Corporation Commission ("SCC"), but the partners may file a statement of partnership authority under Section 50-73.93 of the Code of Virginia, if they so desire. GP's, from a managerial standpoint, operate much like a sole proprietorship, but consist of two or more owners who make business decisions together and also share profits, losses, and liability according to the agreement of the partners. Personal Risk and Liability: The partners' exposure to liability for debts and obligations of the GP remains unlimited, similar to sole proprietorships. More importantly, each partner can also be liable for debts and obligations incurred by the other partners in the course of the business.
Taxation: Tax treatment in GP's can be advantageous, because, rather than being taxed as a separate entity, the GP's income and losses flow straight through to the partners and are reported on each partner's individual returns. However, self-employment tax still must be paid in GP's.
The second we will discuss is the Limited Partnership. Although LP's receive similar tax treatment as GP's, LP's differ from GP's in two basic respects: (i) formation and (ii) personal liability.
Formation and Flexibility: For a LP to exist as an entity, it must file a certificate with the SCC in order to be validly registered.
Personal Risk and Liability: LP's may be more attractive than GP's, because owners in LP's invest only their capital in the entity, which is managed by a general partner. In other words, the liability of a limited partner for partnership debts is limited to the extent of the capital he has agreed to contribute, thereby shielding the personal assets of each limited partner from liabilities of the LP. However, this capital contribution of the limited partner may still be a substantial sum. Unless otherwise provided in the LP's partnership agreement, the general partner of a LP has the same rights, powers, and unlimited liability as a partner in a general partnership. For this reason, it is important that a limited partner not hold himself out to third parties as a general partner, having substantial control of the business, because Virginia courts have found such limited partners to be liable in the same scope as the general partner. The LP is somewhat cumbersome and is not used as frequently as they were prior to the proliferation of the limited liability company. Choosing the right entity will, of course, depend on a number of factors, including, but not limited to, the nature of your business, your long-term goals, and the company's finances. It is always a good idea to consult an attorney experienced in these matters, and the more specific your business plan and your preparation, the easier it will be for your lawyer to help you form the entity that is right for your business.
Part 3 of 4 in this series will discuss the benefits and advantages of the different types of corporations.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.