A limited partnership is a form of business ownership that consists of general partners and limited partners. There is no maximum number of either type of partner, but there must be at least one general partner. The general partners manage the partnership and are typically personally liable for all of the partnership's obligations, as well as for the acts of the other partners on behalf of the partnership. Limited partners are generally exposed to such liability only to the extent of their investment in the limited partnership. However, they are not permitted to participate in management of the partnership without the loss of this liability protection. A limited partnership offers some flexibility when allocating profits and control. This flexibility can provide certain tax and business advantages for individual partners.

State law and the partnership agreement govern a limited partnership. Your partnership agreement should spell out the entire arrangement between the partners and state each partner's share of profits and losses. In cases where the partnership agreement fails to address an issue, state law will dictate how the partnership is to operate. In these instances, your state's version of either the Uniform Limited Partnership Act (ULPA) or the Revised Uniform Limited Partnership Act (RULPA) will determine how disputes are resolved.

Although it's true that many new small businesses go under within their first year or two, there are usually reasons that can explain their failure. If you're aware of the pitfalls associated with the start-up of a new enterprise, you can take steps now to maximize the chances that your business will succeed. Don't start a business you know nothing about. If you're a pastry chef, don't open an auto-body shop. Your experience, skill, and knowledge of the business you wish to run are key to its success.

You'll want to conduct extensive market research to determine if the product or service you will offer is currently in demand. Define who you're marketing to and target your message to them. Also, consider the most favorable time to market your product or service (e.g., toys at Christmas). Of course, another key to your success is location, location, location. Finally, plan your advertising campaign and consider how you will distribute your product or service. Pay attention to your competition. Be sure your product or service offers your customers something your competitors do not.

Set up a written business plan detailing the design of your business growth. Organize a start-up team of people who have abilities you lack. Determine how you will obtain the capital to finance your project, and be sure you have adequate capital. More importantly, make sure you have enough to live on. Many new businesses do not generate income immediately. Finally, include in your business plan an exit strategy for closing the business should things not work out as you had hoped.

A buy-sell agreement is a contract that provides for the future sale of your business interest or for your purchase of a co-owner's interest in the business. Buy-sell agreements are also known as business continuation agreements and buyout agreements.

Under the terms of a buy-sell agreement (assuming you are the seller), you and the buyer enter into a contract for the transfer of your business interest by you (or your estate) at the occurrence of a specified triggering event. Typical triggering events include death, disability, and retirement.

Ideally, buy-sell agreements are fully funded, and life insurance is frequently used for this purpose. After determining the value of the business, you, your advisors, and the other parties to the agreement will determine the best way to fund the transaction, and the triggers appropriate for your business situation. If you own a business and are concerned about how the death of a co-owner might affect its operation, a funded buy-sell agreement can help by ensuring that you will be able to purchase your partner's share, eliminating any doubts about the continuation of the business. You can also avoid the dilemma of being in business with your partner's survivors.

There are also costs and possible disadvantages involved in establishing a buy-sell agreement. One such disadvantage is that the agreement typically limits your freedom to sell the business to outside parties. If you think that a buy-sell agreement might benefit you and your business, consult your attorney and financial professional about the pros and cons of setting one up.

A family limited partnership (FLP) is a partnership created and governed by state law and generally comprises two or more family members. As a limited partnership, there are two classes of ownership: the general partner(s) and the limited partner(s). The general partner(s) has control over the day-to-day operations of the business and is personally responsible for the debts that the partnership incurs. The limited partner(s) is not involved in the operation of the business. Also, the liability of the limited partner(s) for partnership debts is limited to the amount of capital contributed.

An FLP can be a powerful estate planning tool that may (1) help reduce income and transfer taxes, (2) allow you to transfer an ownership interest to other family members while letting you keep control of the business, (3) help ensure continued family ownership of the business, and (4) provide liability protection for the limited partner(s).

An FLP is often formed by a member(s) of the senior generation who transfers existing business and income-producing assets to the partnership in exchange for both general and limited partnership interests. Some or all of the limited partnership interests are then gifted to the junior generation. The general partner(s) need not own a majority of the partnership interests. In fact, the general partner(s) can own only 1 or 2 percent of the partnership, with the remaining interests owned by the limited partner(s).

• There are several advantages to organizing your business as an FLP:
• Limited partnership interests that are gifted to other family members are generally valued at less than the full fair market value of the underlying assets. That is, reasonable discounts to the value of the limited partnership interests are permitted for lack of marketability and lack of control. This means that by gifting the assets via a limited partnership interest instead of an outright transfer of the business assets themselves, you may be saving gift and estate taxes.
• At death, only the value of your ownership interest in the partnership will be included in your gross estate.
• The use of the partnership entity allows you to shift some of the business income and future appreciation of the business assets to other members of your family.
• You maintain management control of the business while transferring limited ownership of the business to family members.
• Restrictions within the partnership agreement limiting the transfer of the partnership interests may help ensure continuous family ownership of the business.

Determining the value of your business is something you should not attempt to do on your own, especially because the IRS could challenge your

valuation. Even the IRS acknowledges that no one true fair market value (FMV) exists for a closely held business. There are appraisers who specialize in determining the value of businesses. Your CPA may be one of these specialists or know someone who is.

FMV is defined by the federal estate and gift tax regulations as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." It is the sale price that a hypothetical buyer and seller would reach, not necessarily the price that the actual owner would agree to or the price that an actual buyer might be willing to pay.

You may have had your business appraised in the past for another purpose. As tempting as it might be, don't use an old appraisal for a new transaction. The purpose of the appraisal can affect the valuation assigned, and time can change the factors that go into the appraisal calculation.

Numerous factors might affect the value of a business. However, the IRS has identified a number of relevant considerations:

• Nature of the business and history of the company
• Outlook for the economy in general and an industry in particular
• Book value and financial condition of the company
• Earnings capacity
• Dividend-paying capacity
• Goodwill/intangible value
• Sales of stock and the size of block to be valued
• Market value of stock in comparable businesses

A number of different methods exist for determining the FMV for a closely held business. Generally, only an appraiser will know how to analyze these factors to reach a conclusion as to the FMV of your business.

Your insurance needs will obviously depend in part on the type of business you operate. However, all business owners should consider at least three types of insurance.

One, you may need business property insurance to cover your assets against various losses that result from natural and man-made causes. Check the policy to determine what assets and events it covers, and purchase riders for any additional coverage you feel is necessary. You may want to cover any building you own and its contents (e.g., furniture, office equipment, inventory, and supplies). If you lease space, you may still want to purchase property insurance; your landlord's building insurance will not cover your business possessions. If you run your business from your home, you should consider purchasing separate business property insurance. In most cases, your homeowners policy does not cover the use of your home for business purposes.

Two, you may also need liability coverage to protect against lawsuits that could arise if the services or products you provide injure or harm your customers or their property. Liability insurance pays the cost of these damages, as well as attorney fees and costs. A similar type of protection for professionals is called Errors & Omissions insurance. Three, if you have employees, your state may require you to purchase workers' compensation insurance. This insurance covers medical expenses and at least a portion of lost wages for employees injured or taken ill as a result of their employment. Your state's laws determine the maximum number of workers you may employ to be excluded from mandatory coverage, and the types of employees (e.g., independent contractors) that you may exclude from coverage.

Think of it as malpractice insurance. Errors and omissions (E & O) insurance protects certain professionals from liability claims or lawsuits arising from their carelessness (errors) or failure to take proper action (omissions). It's an important part of a comprehensive professional liability insurance package.

For example, assume you're an attorney who represents a client in a civil case. You missed the deadline for objecting to an important motion, causing your client to lose his case.

If your client suffers financial loss and sues you, your E & O insurance may provide the financial protection you'll need.

Most E & O policies are tailored to meet the needs of a particular professional group, such as accountants, architects, insurance agents, lawyers, stockbrokers, travel agents, and others. You may be able to purchase an E & O policy through a professional or trade organization, often at a discount. Also, there are probably insurers in your state that sell E & O policies along with other forms of professional and commercial liability insurance.

If you use part of your home to conduct your trade or business, you might be able to deduct certain related expenses. To qualify for the home office deduction, you must pass certain tests.

You must use part of your home regularly and exclusively for your trade or business. Exclusive use means that this space is not used for any nonbusiness purpose, such as watching television, during the tax year of the deduction. If the space is used for business only sporadically or occasionally, you may not meet the regular use test.

Also, your home office must be used as either (1) your principal place of business or (2) a place where you meet customers, clients, or patients in the normal course of business. You may also be able to take a deduction if you use part of your home to perform administrative or management duties and you have no other location to do this work. If you are an employee and work from home, the business use of your home must be for the convenience of your employer in order to take the deduction.

Certain expenses for a separate structure, such as a garage, may be deductible if the structure is used regularly and exclusively in connection with your business or trade. A separate structure that's used in this way does not have to be your principal place of business, or a place where you meet customers, to qualify for the deduction.

If you qualify under these tests, you can deduct certain expenses related to the business use of your home, but your deduction is limited by the percentage used for business and the deduction limit. You can deduct both direct and indirect expenses that apply to the portion of your home that you use for business purposes. Direct expenses are costs expended solely on the part of your home that you use for business purposes, and these can be deducted in full (subject to the deduction limit). They include such expenses as painting, and installation of separate telephone jacks and wiring. Indirect expenses are costs that benefit your entire home, including the portion you use for business. Indirect expenses include mortgage interest, property taxes, insurance, and so on. You may deduct a percentage of these expenses. You may use a square footage calculation or any other reasonable method to compute the business portion of indirect expenses.

If you are self-employed and not a farmer, you must file IRS Form 8829 to take advantage of the home office deduction. IRS Publication 587, titled Business Use of Your Home, offers more information on taking this deduction.

To qualify for an income tax deduction for home office expenses, the IRS requires that you meet two tests--the place of business test and the exclusive and regular use test.

To pass the place of business test, you must show that you use a portion of your home as:

The principal place for any trade or business you conduct, including administrative use. The IRS uses a two-part test to determine if a home office is a taxpayer's principal place of business. The test takes into account the relative importance of business activities performed at each business location and the amount of time spent conducting those activities at each place of business.

A place where you meet clients or customers in the normal course of business.

In the case of a separate structure that is not attached to your dwelling unit, you must show that you use it in connection with your trade or business (i.e., it needn't be your principal place of business).

The exclusive and regular use test requires that you use that portion of your home both exclusively for business and on a regular basis.

Depending on the nature of your work, your occasional home use is unlikely to qualify for a home office deduction since it is doubtful you would meet the first test (because occasional implies it isn't your principal place of business). You are also unlikely to satisfy the second test (because occasional implies that the use of your home isn't exclusive or regular).

Because the rules are complicated, it might be wise to review IRS Publication 587, titled Business Use of Your Home, or consult a tax professional.