Businesses frequently find themselves in a situation where they need to add partners. Sometimes it is because the prospective partner brings a particular skill set. At other times, partners are needed who will invest funds into the business. When a business is considering the addition of partners, it is extremely important to have the right business structure in place.
The simplest type of business entity is the sole proprietorship, meaning that the company is owned by one person. A partnership allows for ownership by two or more individuals. Neither of these two business types provides protection from personal liability. If a successful lawsuit is lodged against the company, plaintiffs can legally go after any or all of a partner's assets.
A limited partnership provides better protection against personal liability. Real estate investment companies and venture capital firms often use this type of business structure. It typically consists of one general partner and one or more limited partners. Personal liability for the limited partners is limited to the amount of funds invested. However, the limited protection does not apply to the general partner. One way to overcome that obstacle is to make the general partner a limited liability company, or LLC.
LLCs provide the best combination of flexibility and liability protection, especially for small businesses. One advantage an LLC has over a corporation is that it eliminates double taxation. Corporations are taxed on profits before making distributions to shareholders. The shareholders are then taxed on the dividends they receive. An LLC is not subject to separate tax, and its owners pay taxes as part of their individual income tax filings. Although LLCs can be formed easily, even online, a business attorney could explain the various options available and recommend an appropriate business structure.
Source: Bloomberg Businessweek, "The Right Way to Bring a Partner Into Your Business", Karen E. Klein, May 15, 2014