Should We Choose an LP, LLP, LLC or Corporation Structure for Two or More Business Owners?

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The process of going into business for oneself can be daunting. When an individual is the sole owner of a business enterprise, that person shoulders every major financial and practical burden associated with running a company. However, there are also extreme stresses associated with going into business with another person or multiple people. Launching a company while tending to multiple visions, sets of priorities and general interests can be a complex and ever-evolving maze to navigate.

Thankfully, once aspiring business owners commit to a legal structure for their new company, some of the major decisions that must be made from a legal standpoint will become definitively settled. At that point, it will likely become easier to merge visions for the company’s management specifically and operations generally. But which legal structure should multiple aspiring owners seeking to form a single company choose? There are both benefits and drawbacks traditionally associated with the three major structures available to multiple owners.

 

Partnership Structures

If you and your co-owner(s) choose to form a partnership, you will be able to choose from three primary options. You may opt to form a general partnership, a limited partnership or a limited liability partnership. Most of the time, when multiple individuals begin conducting business as the co-owners of a company that has not been formally registered with the state, an informal general partnership is created by default. When one forms a general partnership (formally or informally) all partners may be held personally liable for business debts, losses and legal judgments. However, this arrangement benefits from the most flexible management structure available. In a general partnership, all management responsibilities, profits and liabilities are equally shared among the business’s owners unless the terms of a partnership agreement specify otherwise.

A limited partnership features a more rigid management structure, as it contains both general partners and limited partners. While limited partners are usually passive investors who receive profits but do not manage the company’s operations, general partners make business decisions on behalf of the company and remain personally liable for business-related financial liabilities. A limited partnership must have at least one of each kind of partner but may be limited to a certain number of total partners under state law.

Limited liability partnerships boast partners who may act as both general and limited partners to varying degrees. The primary benefit of this arrangement is that no partner may be held personally liable for business-related liabilities. However, it should be noted that in many jurisdictions, this particular business structure is only available to professionals like physicians and attorneys. If you are concerned about the fact that the partnership structure generally does not limit personal liability, you may benefit from forming a limited liability company or a corporation.

 

Limited Liability Companies and Corporations

Unlike most widely-available partnership structures, limited liability companies and corporations do offer personal asset protection for those who manage them and profit from them. The management structures of these two options are more rigid and more paperwork is involved in ongoing compliance obligations, but the liability protections may help to outweigh these other factors.

If you are considering one of these structures, just keep in mind that corporations are beholden to stockholders, while LLCs are not. This is a major departure from most “small business” models and should therefore not be committed to lightly. With that said, forming an LLC and opting to be taxed as a corporation instead of a partnership may help your business to benefit from the best of what each structure has to offer. Speaking with an attorney about your vision for your company and your co-owner’s unique needs and desires may help you to make a decision either way.

 

Business Formation Assistance Is Available

Speaking with an attorney about your vision for your company and your co-owner’s unique needs and desires may help you to make a decision either way. If your new company has legal needs, please note that we pride ourselves not only on our experience, but our affordable and efficient approach as well. Start the process of formally registering your business and ensuring your company’s legal formation needs are met effectively.