In most states, partnerships are simple agreements by two or more people to work together and divide profits. They usually require no formal paperwork, and nothing must be filed in the public records. It is a good idea to have everything in writing, but it usually is not required by law. This is unlike a corporation, which must have certain formal documents and must have something on file in a public place as proof that the corporation exists.
A general partnership is one in which all partners have equal authority to bind the partnership as a whole. They all have equal liability for partnership debts and obligations. If someone sues a partnership and obtains a judgment, that person can collect all the money from any of the partners individually. A partnership files an information-only tax return, but does not pay any taxes. Each partner reports his or her personal share of income or losses on his or her own individual tax return. Usually, if a partner dies, the partnership automatically terminates. A general partnership enjoys ease of setup and maximum flexibility. It is also the format most likely to cause problems, misunderstandings, and possible financial ruin.
Limited partnerships are considered safer. One or more partners will be designated as general partners. They can make decisions, and they have full liability for debts. The limited partners just invest money. They cannot bind the partnership to any agreements. If the deal is a financial disaster, the limited partners will lose their investment but have no further liability. This arrangement requires formal paperwork. Just like a general partnership, there is an informational tax return only. If a limited partner dies, the partnership does not end. A limited partnership has most of the flexibility of a general partnership and some of the limited liability of a corporation.
A limited liability company (LLC) is a legal entity allowed in many states. It is set up in a manner similar to corporations by filing organizational documents with the state. Management is not as formal as in a corporation, but all members enjoy the same limited liability. The LLC may elect how it wants to be treated for tax purposes. These issues should be discussed with an attorney or accountant before deciding to form an LLC. In some states, LLCs must pay a franchise tax, or privilege tax, to the state based on the value of the company's assets. In those states, forming an LLC might not be an appropriate choice for investing in real estate if the asset value is large, because the franchise tax will also be large. Some states limit the franchise taxes if the entity is a family limited liability company.
A corporation is a legal entity that issues stock in itself. The corporation owns all assets and has all liabilities. Investors purchase stock, which they may sell to others unless there is a specific corporate prohibition against it. The investors have no personal liability for debts unless they sign a formal guarantee agreement with a lender. The corporation has a board of directors, which is responsible for management. The accounting, recordkeeping, and meeting requirements are more stringent than with partnerships. If a shareholder dies, the corporation does not automatically come to an end. Instead, the shareholder's heirs inherit his or her stock, and things continue just like before. Some small corporations have buy-sell agreements just like partnerships. If a shareholder wants to exit, or becomes incapacitated or dies, the agreement will control what happens to his or her stock.
Our website is not responsible for the information contained by this article. Webworldarticles.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.
This article was sent to us by:
Andrew Nidder at
06272010
1. Start Investing Money in Real Estate
All articles in this directory are property of their respective authors. Additionally, read our Privacy Policy
© 2010 WebWorldarticles.com - All Rights Reserved.