If you go into business with others, then you cannot be a sole proprietor (with the exception of a husband-wife joint venture, explained earlier). You are automatically in a partnership if you join together with one or more people to share the profits of the business and take no formal action. Owners of a partnership are called partners.
There are two types of partnerships: general partnerships and limited partnerships. In general partnerships, all of the partners are personally liable for the debts of the business. Creditors can go after the personal assets of any and all of the partners to satisfy partnership debts. In limited partnerships (LPs), only
the general partners are personally liable for the debts of the business. Limited partners are liable only to the extent of their investments in the business plus their share of recourse debts and obligations to make future investments. Some states allow LPs to become limited liability limited partnerships (LLLPs) to give general partners personal liability protection with respect to the debts of the partnership.

Example

If a partnership incurs debts of $10,000 (none of which are recourse), a general
partner is liable for the full $10,000. A limited partner who initially contributed
$1,000 to the limited partnership is liable only to that extent. He or she can
lose the $1,000 investment, but creditors cannot go after personal assets.

General partners are jointly and severally liable for the business’s debts. A creditor can go after any one partner for the full amount of the debt. That partner can seek to recoup a proportional share of the debt from other partner(s). Partnerships can be informal agreements to share profits and losses of a
business venture. More typically, however, they are organized with formal partnership agreements. These agreements detail how income, deductions, gains, losses, and credits are to be split (if there are any special allocations to be made) and what happens on the retirement, disability, bankruptcy, or death of a partner. A limited partnership must have a partnership agreement that complies with state law requirements.

Another form of organization that can be used by those joining together for business is a limited liability company (LLC). This type of business organization is formed under state law in which all owners are given limited liability. Owners of LLCs are called members. These companies are relatively new but have attracted

great interest across the country. Every state now has LLC statutes to permit the formation of an LLC within its boundaries. Most states also permit limited liability partnerships (LLPs)—LLCs for accountants, attorneys, doctors, and other professionals—which are easily formed by existing partnerships filing an LLP election with the state. And Delaware, Illinois, Iowa, and Oklahoma now permit multiple LLCs to operate under a single LLC umbrella called a series LLC. The debts and liabilities of each LLC remain separate from those of the other LLCs, something that is ideal for those owning several pieces of real estate—each can be owned by a separate LLC under themaster LLC. At present, state law is evolving to determine the treatment of LLCs formed in one state but doing business in another.
As the name suggests, the creditors of LLCs can look only to the assets of the company to satisfy debts; creditors cannot go aftermembers and hope to recover their personal assets. For federal income tax purposes, LLCs are treated like partnerships unless the members elect to have the LLCs taxed as corporations.
For purposes of our discussion throughout the Topic, it will be assumed that LLCs have not chosen corporate tax treatment and so are taxed the same way as partnerships. A one-member LLC is treated for tax purposes like a sole proprietor if it is owned by an individual who reports the company’s income and
expenses on his or her Schedule C.