Question: I’m a home improvement contractor. I want to bring on a partner into my business. This partner is neither licensed nor insured yet but has the skills needed to grow my company. Should I do a general partnership or a limited partnership?
Answer: Let’s start with some definitions—and a caveat: Partnerships and other business entities are governed at the state level. That means the rules and regulations will vary depending on where your company operates and where it was formed for legal purposes.
Typically, however, a general partnership is a twist on the sole proprietorship—the simplest business entity—with ownership shared by two or more individuals. It does not provide any shield on personal liability. That means if someone successfully sues the company, the partners’ personal assets could be taken to satisfy a court judgment.
A limited partnership typically consists of one general partner and any number of limited partners, says David Black, an attorney with Florida business law firmBerger Singerman. The only personal assets the limited partners are on the hook for are what they invested in the company. But, as in the general partnership, no limit exists on the general partner’s personal liability if a court hands down a judgment against the partnership.
Limited partners are also generally restricted in how they can participate in the company’s operations and decision-making, says Brian Burt, a partner who chairs the emerging business group at Snell & Wilmer in Phoenix. “They can be tricky, but [limited partnerships] are often used in real estate, where a number of passive investors become limited partners. In those cases, you can structure it so that the general partner is not an individual but an LLC,” he explains, referring to limited liability companies. That guarantees protection for the general partner as well. Professional service companies and venture capital firms are entities that sometimes use the limited partnership structure as well.
So what’s your best bet, as a small home-improvement contractor? None of the above, says Melanie G. Rubocki, who co-chairs emerging companies and venture capital firmwide at Perkins Coie in Boise, Idaho.
“Any time you’re doing business, you’re susceptible to being sued, and that’s especially true in construction,” she says. “You need to protect yourself whether you bring on this new partner or not.”
She, and all the other experts we talked with, recommended that you form an LLC for your business—and do it sooner rather than later. Without that legal protection from personal liability, you’re putting your home, your bank accounts, and all your other assets on the line every time you take a job, because no matter how good you are, there’s always the potential for something to go wrong and for a dispute to wind up in court.
Forming an LLC has become relatively cheap and painless these days because there are many online options. Still, it pays to hire an attorney to help you and talk it through with your accountant, as well. The LLC offers a lot of flexibility, so you’ll have a number of choices to make that you could probably use some advice on. For instance, “you may not want to bring this new guy on and give him a huge piece of the company up front,” Rubocki says. “With an LLC, you can structure it so that perhaps he earns his way into the company.”
Depending on how you set up the LLC, there are options to help you manage your profit and losses and to minimize your tax liability. And since the LLC is a “pass-through” entity, your income from the business will continue to be declared on a Schedule C on your personal income tax return, so the company won’t pay corporate taxes. It seems like a no-brainer, whether you take on another owner or not.
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