Small businesses can be organized in a number of ways, including general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), limited liability companies (LLCs) and corporations. Each of these organizational forms has its own characteristics and management requirements.

General Partnerships

A partnership is created when persons join together with the intent to conduct and share in the profits of an unincorporated enterprise. The members of a partnership are its partners, and may include individuals, other partnerships, corporations, trusts, and estates. The parties' intent is determined from all of the facts and circumstances, including the sharing of profits and losses, the ownership of capital, the conduct of the parties, and the existence of a written partnership agreement.

One important feature of a general partnership is that each partner of a general partnership is personally liable to third parties for partnership debts and obligations.

In a general partnership, all partners have equal rights in the management and conduct of the partnership business. However, a partnership agreement may appoint one partner to be "managing partner" or to have more or different duties than the other partners. If there is a dispute over management, the provisions of the partnership agreement control, unless they are contrary to law.

Unless otherwise authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to:

  • Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership
  • Dispose of the good-will of the business
  • Do any other act which would make it impossible to carry on the ordinary business of a partnership
  • Confess a judgment
  • Submit a partnership claim or liability to arbitration or reference

Limited Partnerships

In a limited partnership (LP), members are able to hold an interest in a business without potentially incurring unlimited personal liability for its debts and obligations. A limited partnership must have at least one general partner who has unlimited personal liability to third parties. Limited partners are prohibited from participating in the management of the partnership and can lose their limited liability status if they do so.

Limited Liability Partnerships

Limited liability partnerships (LLPs) are general partnerships whose partners may acquire partially limited liability if the partnership files the required registration documents with the appropriate state office. As a general rule, LLP partners escape liability to third parties for another partner's malpractice or misconduct only if they have not participated in or supervised the wrongdoing.

Limited Liability Companies

A limited liability company (LLC) is a non-corporate entity that provides limited liability and full management rights to all of its owners (generally called members). LLCs are informally organized, and they are governed by a contract, called an operating agreement. Their members are not liable for debts of the LLC simply because they are members. All of the members of a LLC can participate actively in the business's management without subjecting themselves to unlimited personal liability for its obligations.

The members' operating agreement is the principal document establishing how a LLC's business will be conducted. The operating agreement may contain provisions regulating any aspect of the affairs of the LLC or the relations, rights and responsibilities of the members and managers.

By law, the members of a LLC may choose to manage the business themselves, or they may select a manager who may or may not be a member of the LLC. That information should be contained in the operating agreement. If it is not, the members are the managers.

Typically, the members of a member-managed LLC, and the managers of a manager-managed LLC, owe fiduciary duties of loyalty and care to the company and its other members. The duty of loyalty includes the obligations to account to the company, to refrain from dealing with the company in a manner that is adverse to it, and to refrain from competing with the company. The duty of care means acting with reasonable care and in the best interests of the company.

Corporations

A corporation is a business entity created under state law. A corporation has the following characteristics:

  • It continues in existence after the death of its incorporators
  • Management is centralized in fewer than all of the members of the organization
  • No member is personally liable for the debts of or claims against the company
  • Each member can transfer his or her interest in the company without the consent of the other members

The standard corporate structure imposes centralized management by a board of directors on behalf of the shareholders, with officers conducting the daily operations of the business.

If you have any questions about the duties and rights of the managers of these organizations, contact a small business lawyer in your area.

Questions for Your Attorney

  • I am a limited partner in a limited partnership. How do I get the management to change a business decision?
  • Can any member in a limited liability company fire an employee of the business?
  • Can the shareholders in a corporation act contrary to the instructions of a corporate officer?