Best Legal Structure for My Business: Partnerships

Posted by: kevensteinberg
Category: Blog, Business Law

What is a Partnership?

For a business owned by multiple people, the simplest formation is operating as a general partnership. In fact, if you are already in business with someone else or several other people and have not formally chosen a legal structure, under the law, you are considered a partnership even if you do nothing to set one up.

General Partnerships

A partnership is a business agreement between two or more prospective partners. Although it is never recommended, the agreement can be verbal. To protect all interested parties and avoid later conflicts, the agreement should be documented and signed by all partners. A seasoned business attorney can help ensure your agreement covers everything it should and is enforceable in your state. Almost anyone or entity can be a partner, including:

  • An individual
  • A partnership
  • A limited liability company (LLC)
  • A corporation
  • A trust

Limited Partnerships

A limited partnership has two classes of partners: general and limited. Its general partners run the company and are personally liable for all obligations of its obligations. The limited partners are like shareholders of a corporation. They have no control over the business other than determining who manages it. Although the limited partners share in the company’s profits, their potential losses are limited to their contributions to the partnership.

Advantages of a Partnership

Multiple Owners

A partnership can have more than one owner (unlike a sole proprietorship), which can mean less stress and pressure for one owner. Business decisions can be made together, and risks are jointly taken. The roles and responsibilities of running the company can also be split between partners.


Similar to a sole proprietorship, a partnership is easy to form and operate—sometimes being legally created without the members of the partnership knowing it. Generally, you do not need to file any specific documents besides those required to comply with local business laws.


A partnership is flexible and can adapt to the business’s ever-evolving needs. The flexibility of a partnership allows it to run in a manner that best suits the company’s needs throughout its different phases. Additionally, each partner can contribute differently to a partnership, and the partners’ interests in the business do not have to be the same.

Pass-Through Taxation

Partnerships on their own do not owe federal income taxes. Instead, their profits, losses, and credits pass through the partnership to the individual partners. Then they are taxed on each partner’s returns.

Disadvantages of a Partnership

Personal Liability

One of the main disadvantages of a partnership is that each partner can be held personally liable for all the obligations of the partnership. Any partner can sign a contract on behalf of the partnership, binding all partners in a potentially unfavorable contract. Every partner is jointly and severally liable for the partnership’s obligations.

Ease of Dissolution

Unless specific safeguards are in place, the partnership dissolves upon the death or withdrawal of a partner. In some ways, an easy dissolution can be advantageous; however, if you are the partner left behind, it can seriously disrupt your income stream and result in many legal and financial problems.

Requirements for Partnership

The only requirement necessary for forming a partnership is that two or more owners share in the company’s profits and losses. Partnerships are technically formed even without the submission of formation documents. However, all partnerships should have a documented partnership agreement detailing the rules and regulations of the company.

How to Form Your Partnership

Forming a partnership is relatively simple. The basic steps include:

  1. Decide on a business name with the other partners.
  2. Register your business name.
  3. Draft and sign a partnership agreement.
  4. Comply with tax and regulatory requirements.
  5. Purchase and maintain insurance coverage.

Which Legal Structure Is Best for My Business?

Partnerships have their own unique benefits and drawbacks, similar to sole proprietorships except with more than one person. Even if this formation seems like the best for your business right now, you should also learn a little about the following types of business formations before making your decision:

If you are interested in forming a partnership, make sure that you consult with an experienced business attorney before making a final choice. If you decide to move forward with a partnership, it is crucial to have your attorney draft a partnership agreement that includes the rights and responsibilities of you and your business partners. The skilled business lawyers at Steinberg Law can assist with all your business formation needs, including choosing the right structure, meeting legal requirements, and drawing up contracts. Contact our office today to learn more about our services.

Author: kevensteinberg