A partnership occurs when two or more people join together for business
purposes. Itís a legal entity recognized by the state where the
partnership was formed. Partnerships can take many different forms based
on risk allocation and tax purposes. Letís take a look at some common
A word of caution before we proceed: Each state may have slightly
different rules and regulations governing partnerships. Take the time to
sit down with your attorney and hammer out the details.
In a general partnership, all partners are equally liable for any legal
actions or debts of the business. In addition to equal liability, all
partners are also jointly
liable. This means all partners can be sued as a group.
Additionally, as a partner you are liable for the unlawful acts of
another partner or employee of the business.
In a general partnership, all partners get equal voting rights
regardless of how much capital any one partner invested. As for tax
purposes, a general partnership has one level of taxation Ė similar to a
sole proprietor. This means that profits are passed through the
partnership without taxation and distributed directly to the partners.
No local or state filings are required to start a general partnership.
However, it is highly advisable to have a formal agreement in place.
In real estate investment, a limited partnership may be formed if one
partner is supplying the majority of capital but does not want to be
involved in the day-to-day operations.
All limited partnerships have at least one general
partner and at least one limited
partner. A general partner has unlimited personal liability, while
a limited partner is personally liable only up to the amount he or she
invested in the business.
However, a general partner has full voting rights and control over the
business while the limited partner does not.
For tax purposes, a limited partnership is similar to a general
partnership in that the business is not treated as a separate taxable
entity. So all profits pass through the partnership directly to the
partners without added taxation.
In most cases, you need to file with the Secretary of Stateís office to
form a limited partnership.
Limited Liability Company (LLC)
By far the most popular form of partnership is the limited liability
corporation, or LLC. In an LLC, all owners are not personally liable for
the business debts.
In this structure, partners may elect to have the company taxed as a
corporation or a partnership. In the vast majority of real estate
investment situations, the partners would elect to be taxed as a
partnership rather than a corporation. This way profits are passed
directly to the partners without additional taxation.
Of the three structures discussed in this article, an LLC is the most
difficult and expensive to set up. All states require paperwork to be
filed and an LLC operating agreement to be completed. The LLC operating
Agreement sets out the rights and responsibilities of all partners.