Partnerships, Limited Partnerships, and Limited Liability Partnerships — Oh My!

Two (or more) people want to go into business together.  They’re holding hands (metaphorically speaking), ready to skip lightly down the path of shared entrepreneurship, when a legal questions arises:  what form of business should we choose?

The short and obvious answer it:  it depends.  And the decision is a crucial one that should involve the input of an attorney (and an accountant) who understands the laws of your jurisdiction — that is, where you want to open your business.  “Why — why the emphasis on a local attorney?” you may be tempted to ask.  “I’ve read a bunch of stuff on the Internet — isn’t that enough to give me guidance?”

No.  Not only is that not enough, but also you may get information that’s not relevant to the laws of your state.  It may not be strictly misinformation, but it will create a mess if your state doesn’t follow the same rules or procedures.

Take, for example, a recent article on Partnerships Compared to Limited Liability Partnerships.   It correctly points out that “Under long standing law, any business with two or more owners is automatically considered a partnership unless affirmative steps are taken to form the business as something else.”  That’s true.  Entrepreneurs tend to use the word “partner” loosely, as in “the other person (or people) with whom I own and run this business” — regardless if the business is formed as a corporation (in which case the co-owners are called “shareholders”) or as a limited liability company (in which case the co-owners are called “members”).  Without more, two or more people going into business together will have formed a “general partnership.”  And, as the article points out, as a general partnership, each partner is 100% liable for the debts and obligations of the business.  No limited liability shield provided.

So far, so good, except the article goes on to ask: “is there any way to take advantage of the tax benefits of a partnership while avoiding the potential liability problems? Many people think a limited liability partnership is the answer.” Here’s why a local attorney is necessary.

Legal terminology is more than just a matter of bookworms getting exercised over splitting hairs.  The words used and the concepts described have a legal significance — significance that can cause innumerable problems if used and implemented incorrectly.  In New York (where I’m located), what the article describes as a limited liability partnership is something else entirely in my state.  In New York, they’re describing what would be called a limited partnership.  In New York, the right to form a limited liability partnership is limited to certain professions licensed by the Department of Education.  Non-licensed professionals who want to form a business together might consider the limited liability company here in New York.  “Big whup?” you counter.

The “whup” is that it makes a huge difference from a tax and liability perspective if you’re forming a limited partnership versus a limited liability partnership.  Want to pay more in taxes?  Want to be exposed to personal liability? What to unnecessarily spend time and money with the wrong kind of formation?  Be my guest.  Want to avoid all that?  Invest in consulting with a local attorney who knows your industry.

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