General Partnership, Multimember LLC, Corporation: Options for starting a business with a partner

Updated August 30, 2024  |   Published February 15, 2024

Categories:  
• Business

Starting a business with another person is not the same as starting a business by yourself. There are differences in profit sharing, asset ownership, business responsibilities, and more. That’s why businesses with multiple owners must use different business designations than sole owners. We’re going to go over the different ways you can start a business with a partner (or partners) to help you determine what might be the best option for you.

 

What is a general partnership?

General partnerships are businesses with two or more owners that share profits and personal liability for the business they own. A partnership does not require you to register your business with the state. This makes it easy and low-cost to set up. Although, if you want to operate under a name that’s different from your and your partners’ names, you’ll want to register a DBA name with the state. Having a DBA will also enable you to open a business checking account.

Open a Business Checking Account

In a general partnership, each partner has the same authority to enter into business agreements without needing the other partners to sign off. The basic structure of a general partnership could be compared to that of a sole proprietor. Instead of being a singular self-employed person there are many, but you are still filing taxes as self-employed.

Partnership agreement

While it is not required, a formal written partnership agreement is always a good idea to have. It can lay out things like how profits will be distributed, the business’s governing structure, partner responsibilities, and what would happen should one of the partners leave, die, or become unable to function as a partner. Leaving these important details up to a verbal agreement could cause issues.

Shared liability

Shared liability for the business means that the owners’ personal assets are not separated from the business assets. Therefore, if someone were to sue the business, the partners would have to decide how much each of them would have to pay and their personal accounts would not be protected. The same goes for any debts incurred.

Taxes

General partnerships do not file business income taxes separately from their personal. Earnings are considered self-employment income. Partners also must pay taxes on income earned by the partnership that is not distributed, known as “retained earnings.”

 

What is a Multimember LLC?

A multimember LLC functions almost exactly as a regular LLC (Limited Liability Company). It’s simply an LLC with two or more members. Limited liability means your personal assets are separated from business assets, therefore protected. That is the most attractive feature of the LLC. Even though it costs more to start than a general partnership, business owners tend to find it’s worth the price.

Management

There are two management styles for a multimember LLC.

• Member-Managed LLC: Meaning all members have the authority to make business decisions, sign contracts, and manage day-to-day business.
• Manager-Managed LLC: Meaning members still have the authority to make business decisions but one selected manager runs the day-to-day business.

Taxes

Like a single-member LLC, multimember LLCs have the option to file taxes as a partnership, S-corporation, or C-corporation. Partnerships and S-Corps benefit from pass-through taxation by paying on their personal income tax filings while C-corps are double taxed (more on that in the next section). Each state treats S-Corps differently, so read up on Massachusetts S-Corp regulations at mass.gov. It is uncommon for an LLC to choose to pay taxes as a C-Corporation. We recommend speaking with an accountant or tax lawyer before choosing or changing the tax designation of your LLC.

 

What is a corporation?

General partnerships and multimember LLCs are good choices for small to medium-sized businesses. Corporations are a better choice for businesses with multiple employees and/or shareholders earning high profits. They can have either one or many owners/shareholders. Corporations are the most expensive and complex type of business to run. There are many different types of corporations. In this article we’ll cover the most popular: C-Corps and S-Corps.

When should I start a corporation?

According to Forbes, a business that makes at least $60,000 in profits annually may want to consider an LLC or corporation. According to collective.com, you must make at least $40,000 in profit for an S-Corp to make sense, otherwise the cost to start and run your S-Corp would exceed the benefits. But there are many more things to consider aside from profit amount when deciding to start a corporation. Some corporations could even be nonprofit or not-for-profit.

Business operations

Operating as a corporation is the most expensive of these three options. They also have the most restrictions, but those vary on a state-by-state basis. Corporations are required to elect a board of directors that oversees the senior management team in charge of running the company’s day-to-day business. Other things a corporation must do are conduct annual meetings and adopt bylaws. Everything about operating a corporation in the state of Massachusetts can be found on mass.gov.

When a corporation wants to change from a private to a publicly traded corporation, federal laws and regulations get involved and the process is complex. Because of the complexities that come with growing a large corporation, they will typically hire an in-house corporate lawyer who specializes in the review of any contracts, agreements, or legal compliance, among other things. For now, we’ll just be referencing private corporations.

Limited liability

Corporations have limited liability which means their shareholders would not be responsible for company debts. If a corporation were to financially collapse, they would be liquidated. Meaning that someone would be appointed as a liquidator to sell all the company’s assets. However, a corporation could also voluntarily liquidate if they wanted to cease operations.

Taxes

C-Corp owners must file their personal taxes and business taxes separately. This means the corporation is taxed on business profits, and the owner/shareholder is taxed on distributed dividends as well. This is the “double taxation” you’ve heard about. S-Corps use pass-through taxation, so they only pay taxes on their personal tax return.

 

Sources:
https://www.mass.gov/info-details/massachusetts-law-about-corporations
https://www.llcuniversity.com/what-is-a-multi-member-llc/
https://www.investopedia.com/terms/c/corporation.asp