Establishing a successful business is definitely a challenge. Not only is there tough competition on the market, but you also need to make important decisions when it comes to your company’s business structure. One of them is whether you want to have a partnership or if you prefer to be a sole business owner.
To make your decision easier, in this article, we will go through types of partnerships.
What Is a Partnership?
Before we get started, let’s briefly talk about what a partnership is. To put it simply, a partnership is a business operated by two or more individuals. The partnership starts as soon as the partners begin business activities. Contrary to other business structures, such as sole proprietorship, corporation, or s corporation, there are many types of partnership that you can establish.
The partnership agreement usually states all the information connected with the partnership, such as the duties each partner is responsible for. Also, it is worth mentioning that partners might be liable for business debts – although that depends on the amount of participation in the partnership.
Although there are many types of partnerships, here are the five most common ones:
- general partnership
- limited partnership
- limited liability partnership
- LLC partnership
- limited liability limited partnership
In a general partnership, there are two or more partners, all of which have an equal share of profits and losses – unless it is stated otherwise in the partnership agreement. When it comes to general partnerships in which the ownership and profits are not divided equally, those are of utmost importance.
When writing a partnership agreement, remember to include what will happen with the business once you decide to dissolve the partnership. General partnerships are very easy to dissolve – in many cases, it will happen automatically if a partner dies or goes bankrupt.
Now, when it comes to profit and taxes – since the business is inseparable from the owners, the profits are taxed on the personal income level.
In a general partnership, each partner has the power to sign contracts and take loans. All of them take care of the day-to-day management of the business. However, they also have total liability, which means that they are personally responsible for all the business’s legal obligations and debts.
Joint ventures are similar to general partnerships. However, the difference between them is that joint ventures operate for a specified time.
A limited partnership consists of two types of partners – general partners and limited partners. The latter play the role of passive investors – they don’t have any say in the day-to-day operations, nor do they have decision-making rights. Keep in mind that a limited partner can lose their position if they become too involved in the company (e.g., sign contracts or perform other business activities).
General partners, on the other hand, have ownership of the business, and they are responsible for the partnership’s debts and liabilities. They also actively manage the business.
To start this type of partnership, you have to have at least one general partner and one limited partner.
Limited Liability Partnership
The third type of partnership is limited liability partnership (LLP). Limited liability partnerships are very similar to general partnerships – the main difference being that in LLPs, the partners are not personally liable for the business’s debts or other partners’ actions. However, keep in mind that individual partners can be held personally liable in such a partnership if they do something wrong.
If you are located in the United States, make sure to check the laws in your state, as in some cases, only specific groups of people can form limited liability partnerships. Those include accountants, lawyers, or doctors.
An LLC partnership requires two or more partners, all of which are called members. In this business structure, the members’ personal assets are protected. The partners cannot be sued for the business’s debts nor actions. However, they can be held liable for other partners’ actions.
Contrary to limited partnerships, in limited liability company (LLC) partnerships, there aren’t that many restrictions when it comes to who can form one – individuals, other companies, foreigns, or even other LLCs can become a member.
Some of the things that attract people to start this type of partnership are personal liability protection, as well as tax flexibility.
Limited Liability Limited Partnership
The last type of partnership that we will be talking about in this article is the limited liability limited partnership. It is one of the newest ones and is only available to form in some states.
Limited liability limited partnerships are similar to limited partnerships, with at least one partner acting as the general partner and few limited partners. However, contrary to limited liability companies, in limited liability limited partnerships, the general partner’s liability is limited, which means that all the partners have liability protection.
Those states are Alabama, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Minnesota, Missouri, Montana, Nevada, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Texas, Virginia, Washington, and Wyoming. It is also worth mentioning that while it is not possible to form an LLLP in California, the state does recognize partnerships formed in other states.
Since, as we already mentioned, this partnership is one of the newest types and is not available in all states, it would be better to pick another type of partnership – especially if your company operates in multiple states.
The Bottom Line
Starting a business requires the business owner to make many hard decisions that will impact the future, as well as the legal status of their business. One of them is what kind of business type they would like their company to be – whether they want it to be a sole proprietorship, a corporation, or maybe a business partnership.
As you can see, there are many types of partnerships, all of which have their pros and cons. Which one you will choose depends solely on what you think will be the best choice for your business. Good luck!