Business owners must make many important decisions when beginning a partnership, one of which is determining the structure of their business. Considerations such as tax benefits and liability protection are usually of greatest concern, therefore, it is vital to understand the pros and cons of the different business structures.
A corporation can offer the best liability protection but produces unwanted tax results, while a general partnership affords favorable tax benefits but exposes the partners to a wide range of liabilities. This is where the limited liability partnership can be both effective and desirable.
A partnership forms when two or more people co-own a business for profit and share in the profits and losses of that business. Unlike a corporation, there are no formalities for establishing a partnership. However, to become incorporated, the business must file their written articles of incorporation with the state. Partners can agree to organize the business however they please in the written partnership agreement. Once a partnership is created, all of the partners are equally liable for the debts resulting from the wrongful acts of another partner.
Limited Liability Partnerships
This structure provides the best of both worlds, as it shields the business owners from liabilities created by other partners while maintaining the advantageous tax benefits that partnerships have always enjoyed. While the partners enjoy liability protection from the negligence of other partners, they will not be protected from his or her own negligence or malpractice. Limited liability partnerships operate like that of a general partnership, thus, they are taxed in the same manner as a regular partnership rather than a corporation. Where corporations are viewed as separate entities and essentially get double taxed on their income, partnerships are not considered separate entities. Only the partners pay taxes and they are able to deduct any losses from their other income to reduce their personal income taxes.
The organizational form of a business entity can depend on multiple factors such as the need to limit individual liability, tax consequences, and cost. Limited liability partnerships have become increasingly favored by those who wish to reap favorable tax benefits while shielding themselves from the personal liability that is associated with the general partnership structure.