Question

Sam wants to help his brother, Lou, start a new business. Lou is a capable auto mechanic but has little business sense, so he needs Sam to help him make business decisions. Should this partnership be arranged as a general partnership or a limited partnership? Why? Should they consider any other form for structuring their business?

Answer 1

First of all, let’s understand the meaning of general & limited partnership.

A general partnership is a business arrangement by which two or more individuals agree to share in all assets, profits and financial and legal liabilities of a jointly-owned business structure. Such partners agree to unlimited liability, which means either of their personal assets may be liable to the partnership's obligations. In fact, any partner may be sued for the entirety of a partnership's business debts.

A limited partnership (LP)—not to be confused with a limited liability partnership (LLP)—is a partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment.

The partnership should be a LIMITED PARTNERSHIP.

As the question mentions, the help is needed only to start the business which can be done without much involvement in the functioning of the partnership. His liability can be limited to the extent of investments made and he may work on his specific area of expertise. Moreover, Sam doesn’t know much about mechanical stuff and thus, he should be burdened with business decisions and unlimited liability.

The other form of business structure could be:

LIMITED LIABILITY CORPORATION/COMPANY (LLC): There are numerous advantages of a LLC over a partnership form of business, such as limited liability, perpetual succession, access to huge fund raising opportunities etc.

The brothers may decide upon their share in the business according to the capital share and decision-making powers. Luo can be the CEO & MD and Sam may just be an investor or even a director (depends on the terms of contract between the brothers.)