Welcome to The Jayson Law Group LLC’s series on The Legal Aspects of Starting a Small Business in New Jersey. In our third video, we will discuss the partnership business entity. Tune in to more videos to assist you in starting your business.
How Does a Business Partnership Work?
Along with sole proprietorships, limited liability companies, and corporations, partnerships are a type of formal business entity. However, partnerships can actually be divided into three distinct subcategories:
Limited Partnerships (LPs)
Limited Liability Partnerships (LLPs)
To distinguish them from the other two types, partnerships are sometimes referred to as general partnerships, which is the form we will be focusing on in this article.
The state of New Jersey defines a partnership as an association of two or more people who agree to carry on as co-owners of a for-profit business. Partnerships are governed by operating agreements, which we will discuss in greater detail below.
What Are the Pros and Cons of General Partnerships?
Each business structure comes with positive points, and negative points. Could a general partnership be a good fit for you?
What Are the Advantages?
When people hear the word “partnership,” they tend to imagine a pair. However, this is a common misconception. Business partnerships are not limited to two people, which means if you and a group of people want to start a business together, a general partnership might be a suitable arrangement.
The start-up fees are minimal compared to other structures.
Getting started is simple, because there is no requirement to register with the state of New Jersey. You need only register with the county where you plan to conduct your business. However, you will still need an SSN or federal EIN (Employee Identification Number) to register for tax purposes.
Because partnerships are built on operating agreements, it is relatively easy to minimize the chance of encountering unpleasant surprises down the road. An operating agreement, which is a legally binding contract between partners, essentially acts as a blueprint for the partnership. The agreement allows for the partners to decide how the business will be run, who’s going to contribute what in terms of financial resources and the division of labor, and any other matters you wish to outline in advance.
General partnerships are favorable from a tax standpoint, because they are what’s known as flow-through or pass-through entities. As a pass-through entity, the partnership itself does not have to file taxes — only the individual partners. Of course, you should also consult with an accountant for more in-depth information about the tax implications of forming this type of business.
What Are the Drawbacks?
General partnerships do not offer any personal liability protection. This is unfavorable, because if the business is sued or incurs any debts, your personal assets — including the contents of your bank account — can be levied upon. In other words, you are personally responsible for the partnership’s financial obligations. Many business owners have had to declare personal bankruptcy because of debts their business incurred.
Partnerships, by nature, involve a close relationship between the business owners. Do you get along with this person? Do you trust them? Can you see yourself working with them years into the future? Are you a good team player? What do the partners bring to the table as individuals? You need to be very honest with yourself when you think about the answers to these questions, or else you may find yourself in an unpleasant working environment.
If a partner leaves, the partnership dissolves. It doesn’t matter if there are two partners or 10 — the business dissolves regardless.
You cannot transfer your interest in the partnership. However, you can transfer the profits and losses to another person.
If you’re thinking about starting a general business partnership, a New Jersey business attorney can help. To arrange for a consultation, call The Jayson Law Group LLC at (908) 258-0621 today.