Starting a business – legal structure

byMunyaradzi Mafaro published on

The legal structure is important because it will influence your future business operations, particularly in terms of compliance with the law and the taxes you will be required to pay.

There are specific taxes that some businesses are obligated to pay by law and this all depends on the business entity in question. The overall idea here is to figure out what is the best solution for your enterprise and not make the common mistake of being ignorant about planning.

Examples of business entities

The following is a list of legal entities which you could use to decide when starting up your business. Please note depending on which country you live in the names may vary but the concepts are the same even though they will be referred to using other titles.

  • Sole proprietorship
  • Partnership 
  • Limited liability company (LLC)
  • Corporation (Inc)

Limited partnership (LP)

A limited partnership is a form of business structure that is similar to a general partnership or traditional partnership but has its own unique features.

The best way to understand a limited partnership is that there are two classes of partners involved in this business structure which consist of general partners and limited partners.

General partners are the ones who control and manage the day-to-day running of the business. Limited partners are the investors who pour their money into the business partners but they are usually not involved in the decision-making of the business.

N.B. As for accountability, in terms of financial obligations, limited partners have limited liability whilst general partners have unlimited liability which has an economic risk of being personally liable for all debts.

Limited Partnership Agreements

Since we have already established that a limited partnership business has general partners and limited partners. We will now move forward to describe what a generic limited partnership agreement looks like.

For example, a limited partnership company might have a private equity firm acting as a general partner whilst on the other hand you have institutions or high-net individuals acting as limited partners.

What this means is these institutions such as pension funds, investment companies, or individuals will invest in a limited partnership company which is managed by the general partners, who may happen to be either a venture capital firm or private equity firm.

The end result is that the general partners will take that money on behalf of limited partners and spend it on investments such as private companies, startup businesses, or even on publicly listed companies.

Pros of limited partnerships

Forming a limited partnership company has some good advantages which come with it and these are as follows:

  • Limited partners have limited liability protection after investing in the business
  • Because of limited liability, this acts as an incentive for general partners to attract more investors.

Cons of limited partnerships

The following is a list of disadvantages that are to be expected when setting up a limited partnership.

  • General Partners have unlimited liability in a limited partnership
  • If limited partners start to manage the business they will also end up with unlimited liability.