How Are Business Partners Held Liable?
There are three types of partnerships: general partnership, limited liability partnership and limited partnership. The type of partnership determines the amount of liability you can potentially face. Depending on which describes your business, you can define your responsibilities accordingly.
General partnership is the most common type of partnership. No formalities are required for a partnership to be deemed a general partnership. This occurs whenever two or more people decide to be co-owners of a business. In these cases, the co-owners are individually and jointly responsible for all losses or debts. They are also responsible for any tort or contract law claims. Each partner has the obligation to act in the best interest of the partnership. If a partner abdicates his or her duty to act in the best interest of the partnership, then he or she can be sued for damages resulting from this breach of trust or fiduciary duty.
Limited Liability Partnership
This type of partnership does require filing with the state. It is like a corporation, but without the same strict management requirements. A limited liability partnership, or LLP, must follow state laws. It is legally defined as a business entity somewhere between a corporation and a general partnership. Owners manage the business, while members, managers and employees are not held responsible for any debts the business may incur.
In a limited partnership, at least one partner must be deemed a general partner and is responsible for management decisions. The general partner is fully responsible for liabilities and debts. Limited partners, on the other hand, risk only the financial contributions they make. All partners share in the profits.
The type of partnership depends on who shares the profits and who controls the business. All terms and conditions should be defined in a partnership agreement. These include the amount that each partner owns, which partners are authorized to make decision on the behalf of the others, and how disputes between partners are resolved. The partnership agreement should also determine the process for adding new partners, as well as how the partnership can be dissolved or transferred. The clearer and more detailed the partnership agreement is, the more successful the partnership will be.
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