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Is a limited partnership the best way to form your business?

Starting a business requires making a variety of decisions. One that could affect numerous aspects of it involves your choice of entity type. The legal structure under which you form your company dictates how you will deal with taxes, personal liability and other issues.

Your choice of entity also affects the amount of federal and Arizona laws to which your business must adhere. For instance, reporting and documentation requirements are more stringent for corporations than they are for sole proprietorships, but the personal protections also vary widely. You may be looking for some middle ground, and a limited partnership may fit that bill.

What is a limited partnership?

In limited partnerships, one person serves as the general partner who often takes care of the management and day-to-day activities of the business. Limited partners provide capital for the business, but do not participate in its operations. Essentially, the limited partners remain "silent" while the general partner serves as "the face" of the company.

With the creation of limited liability companies, many people moved away from limited partnerships. However, that does not mean that you can't still benefit from the formation of this type of entity. You may want to compare a limited partnership to other entity choices before making your final decision. Obtaining input from your potential partners may also help.

What makes a limited partnership different from other entities?

The general partner assumes full responsibility for any of the company's liabilities, and limited partners take on liability in proportion to their investment. However, if a limited partner involves him or herself in the management of the business, he or she assumes any liability arising out of those activities. Each partner pays taxes based on his or her share of the partnership. 

Variations to a limited partnership also exist. For instance, you may decide that a limited liability partnership would work better for you and your partners. This type of limited partnership combines elements of a corporation and a partnership.

Setting up your business

You may have additional questions regarding the utility, advantages and disadvantages of a limited partnership. By seeking answers to those questions, you may decide that this type of entity will work in your situation. If so, you may then need help with the legalities of setting up your business. Fortunately, you can make use of the legal resources in your area.

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