The structure you choose for your business has implications upon your personal and professional liability as well as your finances. With so many different options out there, it may feel overwhelming. In this blog, we’ll offer a quick overview of the Uniform Partnership Act as well as the most common business structuring options so that you can start thinking about what structure best fits your needs.
Uniform Partnership Act (UPA): Recognized across almost 44 U.S. states, the UPA provides guidelines for the management and, in some cases, termination of general and limited liability partnerships. In particular, this Act outlines the rules and regulations surrounding the creation of said partnerships, fiduciary duties of those involved in the partnership, and offers clear definitions for any assets and liabilities owned by the partnership. Should a single partner leave the business, the UPA dictates that the remaining partners have 90 days to agree to continue the partnership or it will face immediate dissolution.
General Partnership: Governed by the UPA, this is a business jointly-owned by at least two people in which profits and managerial duties are split equally among partners, and all partners take on unlimited personal liability for any debt incurred by the partnership. Two benefits of entering into a general partnership are the flexibility in business structure and status as a pass-through entity. In a general partnership, there is opportunity for partners to maintain closer control of business operations and thus implement new ideas quicker. As a pass-through entity, general partnerships are untaxed, because the owners receive the income directly and any profits and losses are reported on each partner's personal tax returns.
Limited Partnership (LP): Also governed by the UPA, the main difference of a limited partnership from a general partnership is that it must consist of at least one general partner as well as at least one limited partner. While the general partner retains unlimited liability for the business, the limited partners are only liable up to the amount of their capital investments and may not take on a management role in the company. Limited partnerships are also subject to a few regulatory requirements not expected of a general partnership. For instance, a limited partnership must use the word “limited’ in its name. Additionally, partners must file the partnership’s creation with the state to avoid being considered a general partnership, under which all partners would become 100% liable for the business’ debts.
Limited Liability Partnerships (LLPs): Different from Limited Partnerships (LPs), these ventures have no general partners, and all partners share limited liability for the business equal to the amount they’ve invested into it. In structuring ownership this way, creditors will not be able to go after the personal assets or income of any partners should the business fail, and partners do not bear responsibility for the actions of other partners. Similar to a limited partnership, LLPs must include the phrase “limited liability partnership” or its abbreviation in the business’ title. Partners must also file with the secretary of the state in order for the LLP to officially be created. For tax purposes, LLPs are not separate entities and thus, each partner will pay taxes on their own share of income generated by the business.
Cooperative: A business both owned and operated by those who use the business’ goods or services. For this reason, members are often dubbed “user-owners”. Cooperatives must consist of at least five members who share equal say in voting matters regardless of how much or how little they’ve invested. Customarily, a cooperative will be run by an elected Board of Directors and other officers, while members dictate the direction of the business with the use of their voting power. Dissimilar to other types of partnerships we’ve outlined, cooperatives are considered separate legal entities in which members hold no personal liability for business debts, barring negligence, fraud, or recklessness.
Joint Ventures: Business relationships of shared ownership in which two or more people or businesses pool their resources for a specific business undertaking. This venture may grow organically out of an existing contract between the parties or be structured as a wholly separate entity. Unlike other partnerships we’ve discussed, joint ventures are often temporary and will dissolve after the specified goal has been achieved. The different parties within the venture bear no legal responsibility for each other outside of the confines of the joint venture, although they are accountable for any costs, profits, and losses that arise out of the collaboration. Joint ventures can be an effective way of developing and exercising compatible skill sets or tapping into new markets.
Limited Liability Company (LLC): When two or more parties join together to form an LLC, the IRS will typically consider the entity a partnership unless the members otherwise elected it to be considered a corporation. This means that the LLC generally goes untaxed, as the owners’ shares of profits and losses are reported on their own personal tax returns. One important aspect of running an LLC is that it can operate across state lines, meaning owners must file for qualification in each new state. Owners of LLCs should be sure to keep informed of laws regarding LLCs in each additional state in order to ensure compliance with state law and avoid legal repercussions.
Series LLCs: A special form of LLC which allows for one or more “series” or “sub-” LLCs owned by a singular “master” LLC. In structuring this way, the master LLC is able to segregate assets and operations so as to protect the master LLC or one of its sub-LLCs from legal claims involving liabilities incurred by another of its sub-LLCs. Each sub-LLC has its own title, bank records, and operations that are legally separate from the others. This particular type of LLC has only been around since 1996, and only 21 states allow for the creation of Series LLCs as of this year.
B Corp: Businesses may also decide to gain a B Corp Certification, which is a dedication made by the business to be responsible not only for bringing profits to shareholders, but to also conduct their operations in a manner that brings about positive outcomes for the environment and society as a whole. A major pillar of Certified B Corps is balancing and promoting transparency, performance, and accountability. Becoming a B Corp involves mixing stakeholder values in the company’s governance, and businesses take on legal responsibilities to uphold the values consistent with the certification. This includes completing a B Impact Assessment and signing a ‘Declaration of Interdependence’, which serves as a symbol of the company’s commitment to its B Corp mission.
As you can see, there are options when structuring your business. Considerations such as the amount of personal risk you’re willing to take on, the number of partners involved, and the overall mission of your business will come into play. If you’d like guidance and a professional recommendation tailored to your unique position, please reach out to a member of our accounting team. As always, we’re here to help.
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