If you’re thinking about starting a business in North Carolina, you’ll need to choose the right business structure. One option is a general partnership: an association of two or more persons carrying on a business for profit. However, this type of partnership doesn’t have limited liability protection- general partners are personally liable for the debts and obligations of the company. Let’s look at the general partnership vs limited partnership and find out which is best for your company’s business structure.
General Partnership Definition in North Carolina
A general partnership, by definition, is an association of two or more individuals carrying on a business for profit. You create a general partnership by written or verbal agreement with one or more other owners. Once you start doing business together, you become a general partnership. A general partnership does not require official filings to create your business (but you may legally need other types of filings!) A general partnership exists by default if you do business with a partner without forming another business entity. Even if you choose not to file any documents with the Secretary of State to declare your business structure, your general partnership still exists.
A Significant Drawback to General Partnerships in NC
A general partnership business structure does not include limited liability protection that you would gain with other types of entities. Total liability means that you face personal liability for the debts and obligations of the business. In other words, if your partner messes up, you can also face a judgment in a court of law. For example, let’s say your partner loses a client bringing in most of your business, and you now owe vendors. However, your company does not have the assets to pay. If the vendors sue, you are personally just as much on the hook as your partner.
Limited Liability Partnerships
Because of the liabilities you face in a general partnership, many business owners prefer to form a limited liability business structure instead. Limited liability partnerships in NC include:
- Limited Liability Partnerships: With this structure, you still face unlimited personal liability for the general business’ debts and problems. However, if your partner acts with professional malpractice, you can only lose up to the total amount of your capital contributions.
- Limited Partnerships: “General” partners have unlimited personal liability for the general obligations of the limited liability partnership. However, each general partner’s liability for the professional malpractice of another partner only includes up to the amount of their capital contribution. The liability of “limited partners” only includes up to the amount of their capital contribution.
- Limited Liability Limited Partnerships: “General” partners have unlimited personal liability for the general obligations of the limited liability partnership. However, each “general” partner’s liability for the professional malpractice of another partner is limited to their capital contribution. (The liability of “limited” partners is limited to their capital contributions.) (1)
With a limited liability organizational structure, you are no longer personally liable for your partner’s mistakes- you can only lose up to the amount of capital you invested in the company.
Responsibilities in a Partnership
In a partnership, each partner manages the business and contributes to the capital. Most partnership owners verbally work out or write an agreement to govern their business. This agreement is crucial because it outlines:
- Your role and responsibilities in the business
- Your partner’s role and responsibilities in the business
- How you will make decisions together
- What will happen if one partner decides to leave the company (2)
Before forming a general or limited liability partnership, you should consider whether this is the right business structure for your company. You’ll need to weigh the pros and cons of personal liability and decide if you’re comfortable sharing management duties with another person.
Forming a Partnership in North Carolina
Working out business details can prevent financial losses and strife with your partner. Even though the state does not require some steps for a general partnership, consider taking them. Your business is worth a bit of planning. You’ll need to file your business with the state for a Limited Liability Partnership. Crucial steps to set up a partnership include:
- File with the Secretary of State
- Assumed Name: If you choose a name other than the names of the general partners, file a certificate of assumed name with the Register of Deeds Office
- Partnership Agreement: This written or oral agreement determines how you govern your partnership. Consulting a business attorney to help draw up your agreement can prevent financial loss and strife.
- Consider whether you need employees: Look at unemployment insurance and worker’s compensation considerations with your business attorney. Also, ensure with your attorney that you meet wage requirements for your field.
- Open a business banking account.
- Choose a location and rent, buy, or open a “home office.”
- Obtain licenses, permits, and zoning clearances: Your business may need to file for federal, state, county, and city licensing or permits. Talk with a knowledgeable business attorney to understand the exact requirements in your area and field.
- Consider filing any trademark registrations, especially if you design a brand icon.
- Obtain Employer Identification and State Department of Revenue numbers.
Tax Considerations
The Federal government taxes partnerships as pass-through entities. Pass-through means the business itself does not owe taxes. Instead, the IRS taxes partners personally on their share of the general partnership’s income. When considering your business structure, speak with an experienced business attorney to determine which structure can help you pay less in taxes! A partnership may be the right choice if you’re considering starting a business in North Carolina. However, research business structures and liability issues. Speak with an experienced business attorney to determine what business structure is best for your company.
We Can Help
At Hopler, Wilms, and Hanna, our experienced business attorneys work with you to determine the best business structure for your company. We can help you form a general partnership and develop formal agreements to protect your interests. Contact us today to schedule a consultation and find out how we can help!