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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Partnerships and Limited Liability Companies

If you go into business with others, then you cannot be a sole proprietor (with the exception of a husband-wife joint venture, explained earlier). You are automatically in a partnership if you join together with 1 or more people to share the profits of the business and take no formal action. Owners of a partnership are called partners.

There are 2 types of partnerships: general partnerships and limited partnerships. In general partnerships, all of the partners are personally liable for the debts of the business. Creditors can go after the personal assets of any and all of the partners to satisfy partnership debts. In limited partnerships (LPs), only the general partners are personally liable for the debts of the business. Limited partners are liable only to the extent of their investments in the business plus their share of recourse debts and obligations to make future investments. Some states allow LPs to become limited liability limited partnerships (LLLPs) to give general partners personal liability protection with respect to the debts of the partnership.

Example
If a partnership incurs debts of $10,000 (none of which are recourse), a general partner is liable for the full $10,000. A limited partner who initially contributed $1,000 to the limited partnership is liable only to that extent. He or she can lose the $1,000 investment, but creditors cannot go after personal assets.

General partners are jointly and severally liable ...

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