If you’re contemplating going into business with another person or considering a new cooperative business relationship with another commercial enterprise, you may want to avoid the expense and complexity of creating a limited liability company or corporation. General partnerships, limited partnerships, and joint ventures offer an alternative that may meet your needs.
The most common type of partnership is a general partnership. A general partnership is a legal entity, formed by two or more persons, where all owners share equally in rights, responsibilities, and potential liability. In most instances, all partners in a general partnership are involved in the daily operations of the business. The benefits of a general partnership include:
There are also some distinct disadvantages to setting up a business as a general partnership.
The concept of a limited partnership evolved because of concerns about the liability of general partners, which can serve as a disincentive for investment and involvement in a partnership.
A limited partnership is a legal structure with two distinct types of partners: general partners and limited partners. The general partners are involved in the day-to-day operations of the business, whereas the limited partners usually function only as investors. The limited partners are entitled to a specific payout from the partnership, based on the terms of the limited partnership agreement. As a general rule, after the limited partners receive their distributions, the general partners are entitled to distribution of any remaining profits. However, the limited partners only risk the amount they invest in the business—they cannot be held personally liable for the debts and obligations of the business. General partners, on the other hand, are jointly and severally liable for all debts of the partnership and have no shield from personal liability.
A joint venture is a commercial entity between two or more existing businesses, where the companies agree to certain sharing of ownership, returns, and risks, as well as joint management. A joint venture may be incorporated, with the respective corporations holding all shares of stock; it may be formed as a general or limited partnership; or it may simply be governed by a contractual relationship. As a general rule, a joint venture is formed for a specific purpose and typically has a stated duration.
Unless incorporated, a joint venture is not recognized as a separate legal entity by the Internal Revenue Service. However, a successful unincorporated joint venture can then be formalized in a new incorporated legal entity. For that reason, joint ventures are commonly used by businesses and business owners to experiment with new business arrangements.
General partnerships, limited partnerships, and joint ventures all offer ways for businesses and business owners to work together for a common goal, but they have distinct characteristics that need to be considered. An experienced and knowledgeable business law attorney can help you determine which business form is in your best interests.
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