Investing Directly in a Business Part 2
The Partnership
A partnership involves two or more people undertaking a business venture as co-owners, with an intent to make a profit.
The General Partnership
Forming a general partnership is easiest way to go into business with another person. But the simplicity of a partnership can be its downfall, so careful planning is important. One of the principal drawbacks of a general partnership is that a general partner can be held responsible for all debts and liabilities of the partnership. For example, a general partner with only a 1% interest in a business could still be held liable for 100% of the debts and liabilities of the partnership.
The Limited Partnership
From a tax standpoint, it's sometimes better to invest in a partnership rather than a corporation. But in order to address the issue of potentially unlimited personal liability, most states recognize another type of business entity that is called a "limited partnership". A limited partnership must have at least one general partner, but all of the other investors can be limited partners whose potential liability exposure can usually be limited to the extent of that partner's investment. One of the resulting tradeoffs, though, is that an investor must take a passive role in the operation of the business in order to maintain the status of a limited partner.
In many regards, being a limited partner is comparable to a shareholder in a corporation.
The Limited liability Company
A limited liability company is perhaps best described a hybrid of a corporation and a general partnership. It's treated as a corporation for limited liability purposes, but is treated as a general partnership for tax purposes. The owners are called "members". Unlike a shareholder or a limited partner, they don't have to take a passive role in the business. A variation is the limited liability partnership, which can be formed in certain instances by professionals such as lawyers, accountants or engineers.
The Nonprofit Corporation
Just because a business is called nonprofit doesn't mean that it can't make money. One significant limitation for nonprofit corporations, though, is that they cannot take on investors in the traditional sense, because they do not have shareholders. So the only way a person may be able to invest in a nonprofit would be through a loan or some other non-equity investment means.
Investing Directly in a Business Part 2
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