Understanding the different types of partnerships

Sometimes, a corporation or LLC may not be the right fit for your business needs. Fortunately, there are various other business options available, such as partnerships. In the simplest of terms, a partnership is where two or more individuals or entities come together to run a business. Profits and liabilities are usually shared equally between the parties involved.

Understanding the different types of partnerships is important when choosing the best one for your business. The main types include General Partnership, Limited Partnership, and Limited Liability Partnership. Each type has its own advantages and disadvantages, making it an important choice during your business journey.

What is a partnership?

A partnership is an unincorporated business structure formed and owned by two or more parties. It is a popular choice for business partners who want equal levels of responsibility and ownership in a company.

Moreover, forming a partnership is easier than establishing an LLC or corporation since it involves fewer filing requirements; typically, all that is needed is the drafting and signing of a partnership agreement.

What are the types of partnerships?

The main three types of business partnerships in the U.S. are General Partnership, Limited Partnership, and Limited Liability Partnership. While these are fairly similar to one another, there are some small differences that set each one apart.

General Partnership

A General Partnership is the most common type of partnership in business, where profit, liability, and management responsibilities are split equally between partners.

There are a few advantages of a General Partnership. It’s the easiest type of partnership to form and dissolve, and there are few official requirements involved, aside from registering the business and its name with the state. Moreover, there are next to no formal, ongoing business requirements.

Regarding the disadvantages of a General Partnership, with this business type, partners have unlimited legal liability, meaning partners are responsible for any debts accrued by the business, and can be liable for any legal claims brought against the partnership.

Limited Partnership

A Limited Partnership is a partnership where there is at least one limited partner and at least one general partner. The general partner is personally liable for any business debts and is responsible for daily, operational tasks. Limited partners contribute financially but are not involved with the kinds of tasks carried out by general partners. One of the Limited Partnership advantages is the fact that a limited partner can invest without incurring legal liability and therefore be protected from lawsuits.

However, there are some additional downsides to Limited Partnerships; these business types have more formalities to follow such as when starting and dissolving the business. For example, a partnership agreement will need to be filed with the state and during dissolution, the partnership will need to file a “Statement of Dissolution”. Moreover, while limited partners face reduced legal liability, their investments are put at risk if the company faces lawsuits or bankruptcy.

Limited Liability Partnership

A Limited Liability Partnership is similar to a General Partnership, except for the fact that there is limited personal liability for all partners, who are not personally liable for business debts; however, their financial investments can be lost.

Limited Liability Partnerships are usually preferred by businesses such as law and accountancy firms; indeed, some states restrict it so that only these business types can use this partnership structure.

Like a Limited Partnership, a Limited Liability Partnership must register its existence with the state, including information such as the business name, number of partners, and partner details. Likewise, if it dissolves, then it will need to officially report this and make a filing with the relevant authorities. During the business lifecycle, the partnership will also need to make regular filings to ensure the information held about the business is kept up to date.

How are the different types of partnerships taxed?

All partnerships are generally taxed in the same way; profit and losses are passed through to the partners (pass through taxation), who then report their profit and losses on their personal tax returns. Partnerships also need to file annual information returns at a local level and report on their yearly financial losses and gains.

What is a partnership agreement?

A partnership agreement is a crucial contract that outlines the terms and conditions of a partnership. It specifies each partner's ownership percentages, how profits and losses will be shared, and the responsibilities of each partner.

This document is essential as it provides clear guidelines on the business's structure and operations. It typically includes provisions for resolving disputes between partners and details what should happen if a partner leaves the business or passes away. Overall, a partnership agreement offers legal protection for the partners and ensures the business runs fairly and smoothly.

If you’re interested in starting a partnership but unsure where to begin, or what information needs to go into your agreement, Corporate Creations can assist. Contact our team of experts today to find out how we can help you with your partnership business.