Partnership Basics
A business with more than one owner that is not incorporated or organized as an LLC is, by default, a partnership.
By definition, a partnership is a business with more than one owner that has not filed papers with the state to become a corporation or LLC (limited liability company). There are two basic types of partnerships -- general partnerships and 'limited partnerships. This article discusses general partnerships -- those in which every partner has a hand in the management of the business.
The partnership is the simplest and least expensive co-owned business structure to create and maintain. However, there are a few important facts you should know before you begin.
Personal Liability for All Owners
First, partners are personally liable for all business debts and obligations, including court judgments. This means that if the business itself can't pay a creditor, such as a supplier, lender, or landlord, the creditor can legally come after any partner's house, car, or other possessions.
There are a few exceptions to this personal liability. Some of the partners can have limited personal liability if the partnership is set up as a limited partnership. This is a partnership in which only the general partner, who runs the business, has personal liability, while the limited partners, who are basically passive investors, can lose no more than their stake in the partnership. Also, some states allow special limited liability partnerships (LLPs). More commonly, though, businesspeople who are particularly concerned about personal liability choose to incorporate their business or operate as a limited liability company (LLC).
Joint Authority
In addition, any individual partner can usually bind the whole business to a contract or other business deal. For instance, if your partner signs a year-long contract with a supplier to buy inventory at a price your business can't afford, you can be held personally responsible for the sum of money owed under the contract.
There are just a few limits on a partner's ability to commit the partnership to a deal -- for instance, one partner can't bind the partnership to a sale of all of the partnership's assets. But generally, unless an outsider has reason to know of any limits the partners have placed on each other's authority in their partnership agreement, any partner can bind the others to a deal.
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