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Should You Form a GP, LP or Partnership?

The question, should you form a GP, LP or partnership, is rarely a question at all. With a little research, you will usually discover that there is only one appropriate form of partnership for any specific business, rather than multiple partnership alternatives.

Any business with more than one owner is considered a partnership, unless the business has filed to become a corporation or a limited liability company, LLC. Although you are "in" partnership, simply by starting a business with at least one other owner, most partnerships formalize their organization by filing as a general partnership, GP. The limited partnership, LP, shares some aspects of the GP, but it is designed for a very narrow model of operation.

In a general partnership all partners are liable for debts, court judgments and obligations. Any partner can bind the business, as a whole, through a contract or other business arrangement. And, because the general partnership is structured as a pass- through entity, all partners directly share the profits, or shoulder the losses of the business, and all partners report that profit or loss on their personal tax returns.

The basic model for a general partnership assumes that all partners will remain attached to the business. For that reason, if one partner chooses to leave, the partnership must be dissolved, after all obligations have been met and profits distributed. But this necessity can be avoided, if a "buy-sell agreement" is written and implemented when the general partnership is created.

A limited partnership, LP, unlike a general partnership, has two distinct partnership classes: the general partner and the limited partner. The general partner controls the running of the business and is personally liable for any debts, obligations or judgments brought against the business. (For this reason, the business may designate a separate entity, such as a corporation or LLC - which provide protection of personal assets - to be the general partner.)

The limited partner, on the other hand, is not involved in the day-to-day running of the business, and is not personally liable for business debts, obligations or judgments. The limited partner contributes capital for the start-up and operation of the business, and shares the profits of the company, if there are profits, in proportion to his or her investment. The only money that the limited partner can lose is the initial capital that he or she has invested.

Because of the multiple classes of partnership within the LP structure, this organizational model can be as expensive and complicated as running a corporation; and, like a corporation, there are complex securities laws that must be consulted, and, in certain cases, adhered to. The limited partnership is not a business model that should be adopted without consultation with a lawyer, or some other trained professional.

In all cases, before you deicide to form a GP, LP or Partnership, making a full determination of the costs, issues and ramifications of any form of partnership is the best way to ensure that you will make the correct organizational choice for your business.

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should you form a gp, lp or partnership?