Partnerships

In my opinion, it is better to have died a small child then be in a partnership. Unfortunately, many business owners form partnerships and don’t even know it. This occurs when they go into business with another person. If no business entity is formed, law considers business to be a partnership and treats it accordingly.

Partnerships are dangerous for one primary reason: a partnership does not provide any protection from liability and, in many ways, invites personal liability. Under well-established law, most partnerships are classified as "general". This simply means that all partners are contributing to administration and running of partnership business. This classification can have grisly results.

In a general partnership, each partner is jointly liable for debts of any other partner arising from business. For instance, you and your partner go to a business dinner with a client. Your partner has a drink and then a few more. They then get into an accident on way home. Each of partners is liable for damages claimed by injured people. That means YOU! Even if you were not in car, did not rent car, never saw car and don't drink!

Partnerships are a recipe for disaster. Stay away from them whenever possible.

Limited Partnerships

Limited Partnerships ["LP"] are perhaps most misunderstood business entity. A limited partnership is similar to a general partnership, but allows a number of partners to limit their liability by being limited partners. It is critical to note that these limited partners are restricted to simply making a capital [cash, content, equipment] contribution to partnership. They cannot be involved in actively running business. If they are, they lose any protection from partnership debts. Many limited partnerships end disastrously. If you are married to idea of pursuing a limited partnership, you must do so in combination with corporations. That particular strategy is well beyond scope of this article, but feel free to contact me if you wish to pursue a limited partnership.

Business owners should protect themselves by forming entities for their business activities. The real issue is identifying structure that is best for your particular situation.

Maybe. While LLCs offer significant flexibility to small businesses, California charges an LLC tax that can really cramp your profits. This tax is charged on your gross revenues for "privilege of doing business in California" as an LLC. Lucky you. Depending upon your situation, forming an “S” corporation may be a better option in California.

Additional Tax Issues

California allows a single person to own an LLC. This causes problems from a tax perspective. The IRS doesn’t really acknowledge existence of LLCs owned by one person. The IRS takes position that you must have two people to be taxes as a partnership. Accordingly, it treats single owner LLCs as sole proprietorships. The problem with this result is that you end up paying self-employment taxes.

While LLC structures provide significant flexibility, structure is not always best choice for a small business. Make sure you speak with competent tax counsel prior to forming an LLC for your business.