You need to consider many factors when deciding how to structure your business. One of the angles that you must consider is asset protection.
From this vantage point, operating as a sole proprietorship or as a general partnership is risky because your business creditors can get to your personal assets, as well as your business assets. However, limited-partnership (LP), limited liability partnerships (LLP) and limited liability limited partnerships (LLLP) provide some measure of protection.
If you are the sole owner of a business, and you have not formally created either a corporation or a limited liability company (LLC), you are operating a sole proprietorship. Sole proprietorships cannot themselves own any assets; therefore, all of the business assets will be considered your personal property. All of your assets—business and personal--are subject to the claims of all of your creditors—business and personal.
Asset protection strategies may provide limited protection for a sole proprietorship.
What can you do to protect assets if you decide that you still want to operate as a sole proprietorship? You must rely on other asset protection strategies, including post-judgment and bankruptcy asset exemptions, asset protection trusts, use of independent contractors, insurance, etc.
Partnership liability is major risk
If you are a co-owner of a business, and you have not formally created a corporation, LLC, limited liability partnership, limited partnership, or a limited liability limited partnership, you are operating a general partnership. This means that you have unlimited, personal liability for all of the businesses debts, including the acts of employees. In addition, in a general partnership, you also have unlimited, personal liability for the acts of all of the other owners.
If after reading the above paragraph and you still want to operate in the form of a general partnership, here is some general advice: Don't do it. The general partner experiences all of the same exposures to liability as the sole proprietor, plus unlimited, personal liability for the acts of all of his co-owners. This should make even the biggest risk-taker reconsider that decision.
It has been said that when the biggest accounting firms were operating as general partnerships, they relied on one asset protection strategy in particular: a whole lot of insurance. In fact, some commentators attribute the rapid, spectacular collapse of the major accounting firm Arthur Andersen to the fact it was operating as a partnership. Today, all of the (remaining) major accounting firms are organized as LLPs, LLCs or corporations. Small business partnerships should follow the lead of these firms.
Limited partnerships take many forms serve many ends
In a general partnership, all partners have unlimited personal liability for their own actions (or inactions) and those of each partner. In contrast, a limited partnership (LP) has two types of partners: general and limited. In an LP, there is at least one general partner who has unlimited personal liability, and at least one limited partner whose liability is limited to the investment he or she has made in the business.
To achieve limited liability for the owner who is assuming the general partnership interest, it was once common strategy for the general partner be a corporation owned by the individual who otherwise would have directly owned the general partnership interest. Today, this once common strategy, which requires the creation of two entities, is obsolete. The same objective, limited liability for all of the owners, can be accomplished through the use of one entity—the LLC.