When you’re starting a new business, choosing the right entity type is important. You can choose a variety of entities: corporations, limited liability companies (LLCs), nonprofits, partnerships or even sole proprietorships. If you don’t choose, your entity type will default to the entity most advantageous to the state.
Partnerships are organizations with more than one major contributor to the business. Partners can provide money, property, ideas or other benefits to the business. The way the company is managed, along with who gets a share of the profits and who can be held liable for business losses depends on the type of partnership.
In California, there are three types of partnerships: general partnerships (GPs), limited partnerships (LPs) and limited liability partnerships (LLPs).
Limited liability partnership
Let’s start with the last one. A limited liability partnership is one that provides professional services. Specifically, they can practice public accounting, law, architecture, engineering or land surveying. You can also set up as an LLP if you provide services or facilities to another California LLP.
LLPs have some tax advantages, but the main reason people choose this entity type is protection from personal liability. In an LLP, no individual partner is legally liable for the wrongdoing of another partner or for business debts and obligations. In exchange for this freedom from liability for partnership losses and debts, there are certain insurance requirements.
General partnership
If you are one of two individuals working together in a business for profit, you can set up as a general partnership. The main advantage here is pass-through taxation. That is, the profits of the partnership are taxed as the personal income of the partners. Otherwise, it is important to understand that each partner is fully liable for the debts and obligations of the partnership.
You do not actually have to register a general partnership with the California Secretary of State. This is the default business structure for multiple owners. (Single owners default to sole proprietorships.)
Limited partnership
This is slightly different from a general partnership because you can limit the liability of all but one of the partners. There must be one general partner who has unlimited personal liability for the partnership’s debts and obligations. The general partner acts as the controlling partner. The other partner or partners are called limited partners, and their degree of personal liability varies by the amount of control or investment they have in the business.
Again, this is a pass-through tax entity, meaning that the profits of the business are taxed as personal income to the partners.
If you have questions about whether a partnership is right for you or which type of partnership you should choose, please contact an experienced business law attorney.