8.4. Considering Partnerships and Limited Liability Companies

Suppose you're starting a new business with one or more other owners, but you don't want it to be a corporation. You can choose to create a partnership or a limited liability company, which are the main alternatives to the corporate form of business.

NOTE

A partnership is also called a firm. You don't see this term used to refer to a corporation or limited liability company nearly as often as you do to a partnership. The term firm connotes an association of a group of individuals working together in a business or professional practice.

Compared with the relatively rigid structure of corporations, the partnership and limited liability company forms of legal entities allow the division of management authority, profit sharing, and ownership rights among the owners to be very flexible. Here are the key features of these two legal structures:

  • Partnerships: Partnerships avoid the double-taxation feature that corporations are subject to (see "Choosing the Right Legal Structure for Income Tax," later in this chapter, for details). Partnerships also differ from corporations with respect to owners' liability. A partnership's owners fall into two categories:

    • General partners are subject to unlimited liability. If a business can't pay its debts, its creditors can reach into general partners' personal assets. General partners have the authority and responsibility to manage the business. They are roughly equivalent to the president ...

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