ABA Family Legal Guide

Forming and Operating a Small Business

Types of Business Organizations

Partnerships

Are partnerships widely used?

Not as widely as they once were. As a way of organizing a business, they appear to be giving way to the limited liability form of business organization (see page 498). This form of organization has many of the advantages of partnerships and few of the disadvantages.

Q. What are the different kinds of partnerships?

There are two main types of partnerships recognized in the United States: general partnerships and limited partnerships.

In a general partnership, each partner has unlimited liability for the debts and obligations of the partnership. Moreover, any partner can bind the partnership contractually to third parties. For these reasons, it is important to define in a written agreement what decisions partners can make individually and which ones require a vote of the partners. In addition, most states require that the partnership file a certificate in the county in which it will do business.

Unlimited liability means that if you're a general partner, not only can you lose whatever money or other property you have put into the partnership, but also your house, boat, and stock portfolio might go to pay the claims of the partnership's creditors. In terms of management responsibility, general partners carry the load--they actively run the business on a day-to-day basis.

In a limited partnership, there must be at least one limited partner and one general partner. The advantage of being a limited partner is that if the business is unsuccessful, the limited partner may lose the amount of money invested in the partnership, but has no other financial risk. So if you are the limited partner, you'll bear the same risk of loss as a shareholder in a corporation or a member of a limited liability company. That's why limited partners are said to have limited liability. Limited partners also have no management responsibilities within the company, and are in fact forbidden from managing company business.

In terms of the business's stability, adding or subtracting limited partners is not potentially as disruptive as the retirement, death, or disability of a general partner. In terms of paperwork, there's more if you set up a limited partnership.

Professionals, such as accountants, lawyers, and architects, frequently use limited liability partnerships. The advantage of these partnerships is that each partner is not personally liable for the malpractice of other partners. However, they may be personally responsible for the debts and obligations of the business, so their liability is less limited than it would be in a corporation or a limited liability company.