Should We Form A Partnership?
Florida’s single proprietorships,LLC's and corporations account for the majority of active businesses. However, partnerships could be beneficial to those who wish to do business in Florida. There are four types of partnerships legally able to be registered as businesses in the state.
Why Form a Partnership?If your business plan includes the involvement of two or more people with equal talents and resources to contribute, then a partnership company formation may be right for you. Under a partnership structure, the principals have certain tax benefits and employees with exceptional performance can be promoted to become a partner in the business.
In addition, there are certain advantages when it comes to administration and future flexibility.
General AdvantagesLower Cost. Partnerships are generally less costly to set up and less regulated than Corporations and even some LLCs. This means potentially less paperwork and legal costs in the beginning. (note: Limited Liability Limited Partnerships are the exception to this rule)
More Funding. There is greater potential to get a larger start-up financing and investment with partnerships than with corporations.
Tax benefits. All partnerships are considered pass-through entities, which means that the income is not taxed at the partnership level. Instead, income passes through the company to the partners where it is taxed for the first time. This is in contrast to C Corporations (or other non-pass through company formations) where all income runs a risk of double taxation: first at the company level and then again as personal income.
Flexibility. Partnership structures are relatively easy to change in the future should you decide that a corporation is a better fit for the future of your business.
Like LLCs and Corporations, there is no requirement for any of the partners to be Florida residents. It is worth noting however, that if your state or region collects personal income tax you may be required to report income from your Florida partnership on your state/regional tax return.
There are specific caveats and disclaimers to each of the advantages listed above – it is paramount that you hire an attorney to explore the advantages you will experience based on the specific circumstances of your business and your partners.
General DisadvantagesPartnership disputes that lead to impasses can occur. This is especially the case if all partners have an equal share in the business and make all decisions jointly. If such disputes end in dissolution, the task of dismantling a partnership equitably could be onerous and costly.
If a non-limited liability formation option is chosen (as would be the case in General Partnerships and Limited Partnerships) then the personal assets and legal liabilities of the partners are at risk.
Now, let’s look at partnerships in more detail:
The General PartnershipIn Florida, this is the partnership equivalent of sole proprietorship. There is no requirement to register the business or to formalize the business in writing in any way. The partners are all considered equal principals and representatives of the business. They benefit from the above-mentioned “pass through” tax treatment that all partnerships enjoy. However, they are personally responsible for the debts and legal liabilities of the business as there is no limited liability protection in a General Partnership.
The Limited Partnership (LP)A Limited Partnership is a registered company formation that includes at least one general partner and at least one limited partner. The general partner makes personal financial contributions to the business at the same level as she would in a General Partnership. She is also personally liable for debts and legal actions as would be the case in a General Partnership. The limited partners of the business can share in the profits of the business usually at a level less than that of the general partner. Limited partners do not actively manage the business nor represent the business at the level of a principal. In many cases, they may be individual investors, other companies or former employees who have been promoted to a level that allows them to have a stake in the business. Limited partners are also treated differently under Florida Law. The 2005, Revised Uniform Limited Partnership Act (RULPA) specifically shields them from liability. This is similar to the liability shield afforded to Florida Corporations in general and the two other limited liability partnerships described below.
The Florida Limited Liability Partnership (LLP)Florida LLPs are registered for-profit entities where each partner has both the decision-making authority of a general partner and the liability shield afforded to limited partners. This is an attractive formation type for organizations that have partners who are expected to actively manage the business on a day-to-day basis. This is because each partner in the businesses is able to commit the business to contractual obligations or otherwise represent the business as a principal.
This, of course, presents a hazard to the partnership as well. Equal authority among partners means that Limited Liability Partnerships require strict coordination, constant communication and trust. It is highly recommended that a solid legal foundation (via a well-drafted Partnership Agreement) is established early on to prevent partnership disputes and disagreements.
The Limited Liability Limited Partnership (LLLP)Limited Liability Limited Partnerships are, in essence, LLPs with the added advantage of having two classes of partner: general partners with full authority who enjoy limited liability, and limited partners with no partner level authority who also enjoy limited liability. This formation type gives partners the most flexibility in assigning any number of general partners and limited partners to suit the needs of the business. All partners benefit from the tax pass-through status and liability shield inherent in all types of limited liability formations.
It is worth noting though that this type of partnership formation requires similar regulatory paperwork to a corporation. The increased reporting requirements make this option slightly less attractive for some businesses.
What about Joint Venture Partnerships?Joint Venture partnerships or “JVs” are not registered partnership formations. Instead they are agreements, usually temporary, between two companies that agree work together on a mutually beneficial campaign or project. The JV created may itself require some form of company formation though the overall structure of the venture would be governed by a Joint Venture Agreement. This document typically has language referencing certain types competitive behavior and the handling of certain trade secrets and intellectual property. It is imperative that any two companies or entities entering into a JV relationship seek legal counsel early to draft, review and negotiate the terms of the agreement.
SummaryEntering into a partnership of any kind is a serious business decision that requires thought, discussion and the involvement of legal expertise. While the basic information provided in this article shows the general benefits and challenges of several partner formation types, it is important to seek the advice of an experienced business attorney before taking any action.
An attorney can help by:
Working with you to select the right company formation type to fit your needs
Drafting formation documents, including partnership agreements and other contracts that protect your legal rights and allow the business venture to operate at an optimal level
Serving as your registrar and ensuring that your business is compliant in its reporting requirements
Advising ongoing compliance to beware of activities such as comingling of funds and other actions that could negate the liability shield otherwise in place for principals of limited company formations
Are you thinking about starting a partnership in the State of Florida? Call South Florida Law’s experienced business attorneys today for a free consultation on (954) 900-8885.