If you’re starting a business, there are plenty of options available for the type of entity you want to form, including:
- Corporation (taxed as an S corp or C corp)
- Limited Liability Company (taxed as a sole proprietorship, partnership or S corp)
- Non-profit (known as a non-stock corporation in Virginia or nonprofit corporation in North Carolina); and
- Partnership (general, limited, limited liability)
This article focuses on the Partnership – a common term used in business, but what many might not understand is a formal legal entity. Under Virginia law, a partnership is created when two or more people agree to carry on a business for profit as co-owners. As opposed to the LLC or Corporation, the partnership entity requires no type of filing or documentation (unless the partners want to create a limited partnership). Thus, if you have ever run a business with a friend and you both split the profits, you just might have entered into a partnership!
Partnerships were extremely popular in early corporate history but have since been mostly phased out by the Corporation and LLC. There are a few distinct characteristics of partnerships that render them less popular.
First, partners in a partnership, generally, share equally in the profits and equally in the losses. Virginia law allows for the partners to create an agreement and change those percentages, but the main point is – partners are personally liable for the partnership’s debts and obligations.
Second, partnerships require unanimous support for major decisions including adding a new partner and other major business decisions. This can of course be changed in an agreement, but these rules are a lot less flexible than other entities.
Partnerships are not the most popular entity out there, but they are still around and important to know about! Our team recommends the LLC or the Corporation for most businesses. We generally recommend that our clients avoid establishing partnerships. The biggest mistake we see people make is accidently establishing a partnership since no formal filing is required. Are you interested in starting up a business? Please reach out to us! Our team provides turn-key solutions to your business through an efficient streamlined process. We have assisted hundreds of businesses with formation. Give us a call today!