There are various ways to compile business formation. Partnerships and limited responsibilities are two choices.
If you are running a business, you might be surprised. If the business has two or more owners and no particular business entity has been formed, you are in a partnership! Why? In a long-standing law, any business with two or more owners is automatically considered a partnership unless affirmative steps are taken to form a business as something else.
Partnerships are a business form that has a horrendous and negative benefit that is horrendous. Personally, I believe it must be used with economical as a business form. Why? Well, the partnership does not provide protection to its owner. If the partnership is required, all partners are responsible for debt. This responsibility is total. If you only have a 10 percent of the partnership, you can still pay 100 percent of debt if you are one with money. For this only reason, I believe partnerships must be avoided as an outbreak as a choice of business entities.
So why are there people who form a business as a partnership? In words – tax. Partnership entities do not pay taxes. Instead, finance partners pass through partners in accordance with the percentage of ownership. It makes life easy from a tax perspective and avoids a lot of complexity of business taxation.
So, is there a way to take advantage of tax benefits from partnerships while avoiding potential obligations? Many people think limited accountability partnerships are the answers.
Limited accountability partnerships are like general partnerships with one big exception. Limited partners are protected from personal obligations. “LLP” takes the following form. There is one general partner that really runs a business every day. Then there are several limited partners that contribute capital for partnerships in the form of cash, products and so on. If LLP is required, general partners do not have protection. However, limited partners can only lose their investment in business.
So, why does everyone not just form a limited accountability partnership? Well, limited partnership position is completely restricted. As a limited partner, you cannot be involved in running a business. You are basically limited to contributing capital to improve business and run. If you don’t like the way things done, there’s not much you can do. If a limited partner becomes active in running a business, he loses all protection from responsibility.