When forming a business, various formation structures are available to select. The structure you choose determines your liability and tax structure. If you formed your company with another person or with multiple different people, you might want to consider the benefits of establishing a partnership. If you form a business with one or more other people and fail to make a conscious decision as to what structure to choose, the law will deem your business a general partnership.
According to the FTB, you can establish a partnership with two or more people. The most common types of partnerships include general and limited partnerships.
In a general partnership, absent a general partnership agreement to the contrary, you share the company equally among your partners. Each person in the partnership carries the same responsibilities and also has the same rights within the company. In a general partnership, you determine who pays the debts because you all have liability regarding business debts. You can all make binding decisions for the business and control and manage it how you see fit.
If you have a partnership with limited partners, there are more restrictions placed on the limited partners. A limited partner does not have control of the company. He or she cannot manage the business or remove his or her original contribution. Limited partners do not make binding decisions for the company. They offer a contribution of money or property in the beginning and do not owe any money towards debts beyond the amount of their contribution. Limited partnership can only be formed by following specific rules, which including the opportunity in the partnership agreement to strictly define every person’s responsibilities.
In forming a partnership, the partners all determine how to distribute profits and losses. Additionally, each partner individually reports their income and pays their share of the taxes.