can still start your partnership the old-fashioned way, with a simple handshake. However, there are a variety of options that address a range of tax, capitalization and liability requirements. Your attorney and/or accountant will help you select the business formation that best fits your situation.
The easiest form of partnering is the traditional one–the general partnership which literally can be started with a handshake. In this situation, all parties have a direct interest in the business and are personally liable for its debts and any claims clients/customers may have should the business default on a contract. Unless there is a formal partnership agreement spelling out how assets and debts will be divided upon dissolution of the partnership, most states will dictate a 50-50 split, regardless of who originally put up the most money or time. At tax time, profits and losses “pass through” to your personal income and are taxed at your personal rate. A general partnership is good for those not concerned about personal debt or other liabilities.
One of the newest ways to partner is the limited liability company (L.L.C.), which protects the partners–called members–from liability for the wrongful or negligent acts of the business, in much the same way shareholders are protected from a corporation’s problems. An L.L.C. offers the same pass-through tax benefits found in a general partnership where partners pay personal taxes on their profits or losses. Professionals, such as doctors, lawyers and accountants, can set up a limited liability partnership (L.L.P.).
Another option is the limited partnership, in which a general partner (which can be an individual, several people, an L.L.C. or a corporation) teams up with a passive partner (same range applies) whose interest is limited to the investment in the business. The limited partner, also called a silent partner, is shielded from liability as long as he or she (or they) doesn’t participate in the day-to-day running of the business or decision making. The general partner, however, is personally liable for debts and claims. This format is typically found in the entertainment industry, where the limited partner puts up the cash and the producer runs the show, and in deals involving foreign investors.
The fourth format is, of course, incorporation. The C, or regular corporation, is a stand-alone entity owned by shareholders and managed by a board of directors. Its profits are taxed directly by the federal government. Shareholders are taxed only on their dividends. In a subchapter S-corporation, a tax status the owner(s) must elect through the IRS, profits (including dividends) and losses from the business pass directly to the individual shareholders in proportion to their percentage of ownership and are taxed at the personal rate. Both types of corporations protect shareholders from liability for the company’s wrongdoing or errors.