by Gary W. Smith

Choosing the right entity for your business isn’t easy.  In our first post, we listed questions you need to consider and the potential tax structures available to your business.  In this post, we will look at the fourth structure, partnerships.

There are many different types of entities taxed as partnerships, including:

• general partnerships,
• limited partnerships,
• limited liability partnerships,
• and limited liability companies.

Limited liability companies can also be taxed as corporations (C or S) or disregarded as entities separate from the owner for income tax purposes.

How do you know which entity to choose for your partnership?  It depends on the state (or country) where you form the entity.

States charge different franchise taxes and annual fees for limited partnerships and for limited liability companies.  You should find out the different fees and franchise taxes for your state as part of deciding which entity may be best for you.  You may find using a limited partnership is cheaper than using a limited liability company.

Also, states have different laws that impact the rights of owners and rights of creditors in major ways.  You will want to understand if an owner can force a purchase of the owner’s interest in the entity and if a creditor can, as a result of a judgment against an owner, take assets of the business.  You will want to understand what restrictions on management and operation of the entity exist and what you can change by agreement of the owners.  You may decide to create an entity in a different state as a result of these restrictions and rights.

Keep in mind that the different structures offer you varied levels of liability protection.  A general partnership offers none.  A limited liability company offers the same as a corporation (in most states).  The different types of limited partnerships fall in between.  Also, certain states allow you to elect out of liability protection for the entity in order to obtain other benefits (typically tax related).

There are many factors to consider, and we haven’t mentioned income and payroll taxes yet.  We’ll look at those issues in the next post.

Please feel free to send me an e-mail at gary.smith@vennlawgroup.com if you have a question about these options.

Gary W. Smith is an attorney at Venn Law Group with more than 20 years’ experience providing legal counsel and innovative solutions to business owners and management teams. His areas of focus include mergers and acquisitions, succession and exit planning, securities and capital structures, business structures, and tax. He excels at navigating the legal complexities of diverse industries ranging from professional services and IT infrastructure to manufacturing and real estate.