Are owners of a partnership personally liable for business debts?

Legally, a partnership is inseparable from its owners. As a result, each partner (with the exception of the limited partners in a limited partnership) is personally liable for the entire amount of any business-related obligations. This means that if you form a partnership, creditors can come after your personal assets (such as your house or car) to make sure any partnership debts get paid.

In addition, you are legally bound to any business transactions made by you or any of your partners, and you can be held personally liable for those actions. For example, if your partner takes out an ill-advised high interest loan on behalf of the partnership, you can be held personally responsible for the debt.

In contrast, owners of limited liability companies (LLCs) and corporations are not personally liable for business debts.

What happens if one partner wants to leave the partnership?

Before you go into business together, you and your partners should decide what will happen to the partnership when one partner retires, dies, or wants to leave the partnership for some other reason, such as a divorce or bankruptcy. You might feel like you're being overly cautious or pessimistic, but it almost always makes sense to include "buy-sell" provisions in your partnership agreement to deal with these issues. It's the best way to prevent resentments and serious problems (including messy lawsuits) from cropping up later on.

What are the differences between a partnership and a limited liability company?

When two or more people go into business together, they've automatically formed a partnership; they don't need to file any formal paperwork. By contrast, to form a limited liability company (LLC), business owners must file formal articles of organization (sometimes called a certificate of organization) with their state's LLC filing office (usually the secretary of state or department of corporations) and comply with other state filing requirements.

Aside from formation requirements, the main difference between a partnership and an LLC is that partners are personally liable for any business debts of the partnership -- meaning that creditors of the partnership can go after the partners' personal assets -- while members (owners) of an LLC are not personally liable for the company's debts and liabilities.

There is one similarity between LLCs and partnerships, however. They both offer "pass-through" taxation, which means that the owners report business income or losses on their individual tax returns; the partnership or LLC itself does not pay taxes.

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