Three Common Types of Partnerships

Author: NCH Internal Editorial Team
Reviewed by Cort W. Christie, MBA
Cort W. Christie, MBA is the Founder of Nevada Corporate Headquarters (NCH) and a nationally recognized entrepreneur, executive, author, and speaker. Mr. Christie has spent over 32 years helping business owners structure, protect, and scale their companies.

This article has been reviewed by Mr. Christie to ensure accuracy and value for today’s entrepreneurs. Jump to...

Are you thinking of starting a business but afraid of doing it alone? A partnership may be the perfect structure for you if you want to launch a startup with the help of a friend.

Partnerships allow you to manage and operate a business with the help of another entrepreneur or a partner. There are three types of partnerships, each with advantages and disadvantages.

But how do you know which type of partnership is perfect for you and your potential partner? Find out below.

What are Partnerships?

A partnership is a business structure formed by two or more individuals who want to manage and operate a company together. The owners or the partners must share liabilities, profits, and losses equally.

There are two types of partners: general and limited partners.

A general partner actively manages and controls a portion of the business operations. They can contribute capital, skills, and expertise to the partnership.

Meanwhile, a limited partner has no say in the business's operations and can only contribute capital to the venture.

Types of Partnerships

There are three types of partnerships: general, limited, and limited liability.

General Partnership

General partnerships (GPs) are the easiest type of partnership to form. In this arrangement, all partners are personally responsible for any debts and other obligations the partnerships incur.

If the partnership defaults on a loan, the debtor could seek the partner's personal assets to settle the balance.

Limited Partnership

Limited partnerships (LPs) have general and limited partners. The general partners are unlimitedly liable for the business, while limited partners are only liable for their share of the partnership.

However, this setup only works if one of the partners volunteers as a general partner.

A partnership agreement is crucial in forming this type of partnership. Partnership agreements are written contracts outlining the rights and responsibilities of partners.

Limited Liability Partnership

Limited liability partnerships (LLPs) are similar to limited partnerships, but only all partners have the same liability protections. In an LLP, partners are not liable for the other partners' actions and cannot be held personally responsible for the business.

LLPs are a common structure for professionals like accountants, lawyers, and architects who want to establish their own firms. It protects them from malpractice and any other wrongful acts committed by their partners.

Which Type of Partnership is Best?

It's challenging to say which type of partnership is best. It all depends on what your needs are and the goals you want to achieve. But to help you make the right call, we've listed down the benefits of all three partnerships:

Advantages of Choosing a General Partnership

• Easy to Form: You don't need state filings to form a general partnership. Your partnership will be formed as soon as your operations start.
• Low Cost: Since you don't have to file formation documents with the state to form a partnership, you don't have to pay incorporation or annual filing fees to maintain it. However, depending on your state, you may still need a business license to start your operations.
• Easy to Maintain: Unlike corporations, general partnerships don't have to comply with requirements such as holding annual meetings and issuing partnership assets. The partnership agreement should outline each partner's roles and the partnership's management structure.

Advantages of Choosing a Limited Partnership

• Control: If you're a general partner, you can limit the amount of control limited partners have depending on their share of capital.
• Limited Liability: As a limited partner, you can enjoy liability protections. However, your protection level is based on your share in the partnership.

Advantages of Choosing A Limited Liability Partnership

• Asset Protection: Your assets are protected from the wrongful acts of your other partners.
• Ideal for Professional Services: LLPs are designed to be created by professionals who offer specific services, such as accountants, attorneys, architects, dentists, doctors, and other similar fields.

How to Write A Partnership Agreement

Partnership agreements are crucial to business partnerships. They define the terms of the relationship and act as a roadmap for both partners.

A comprehensive partnership agreement should include the following information:

• Name of the business partnership.
• Goals of the partnership.
• Contribution amounts of each partner.
• Ownership interests of each partner.
• Management duties and responsibilities of each partner.
• Level of liability of each partner.
• Distribution of profits and losses between partners.
• Procedures for resolving disputes between partners.
• Process for removing and adding new partners.
• Terms for dissolution of the partnership.

If you're having trouble starting your draft, here's a step-by-step process you can follow:

• Indicate your Partner's Name and Business Address: When you write a partnership agreement, you must first include your and your partner's full name and address. You should also indicate the name of your business and its address in this portion of the document.
• Outline your Purpose: Think about why you started your partnership in the first place and outline your answers. What goals or objectives do you and your partner want to achieve? What kind of business do you want to create? These are some of the questions you can ask yourself when determining the purpose of your partnership.
• Allocate Interests & Shares: A comprehensive partnership agreement outlines each partner's ownership interest and percentage in the business. It should also detail how profits and losses will be distributed among partners.
• Specify Responsibilities and Liabilities: This part of the agreement defines each partner's duties, responsibilities, and extent of liability for any debts and obligations the partnership earns.
• Determine Dispute Resolution: Disagreements are common in business partnerships. But the good news is that you can easily prevent them from becoming legal disputes by including dispute resolution processes in your partnership agreement.
• Determine the Duration of the Partnership: Your partnership agreement must also indicate whether your partnership has a fixed term or is continual. This clause should clarify the existence of your partnership.
• Identify the Process for Dissolution: Lastly, a comprehensive partnership agreement outlines the procedures for dissolution. A proper dissolution procedure and a continuity plan can help you maintain operations should one of your partners decide to leave the business.

Mistakes to Avoid When Writing A Partnership Agreement

Undeniably, writing a partnership agreement on your own can be challenging. You must be careful about what you put in the document to prevent any legal or financial issues later.

Some of the most common mistakes you need to avoid include:

Using Generic Templates

One of the most common mistakes partners make when writing agreements is using generic templates they found online.

While there's nothing wrong with following a format you found online, partnership agreements are most effective when customized to fit the needs and goals of the parties involved.

Failing to Consult a Lawyer

Consulting a lawyer is one of the most important steps in writing a partnership agreement. A lawyer can help you draft legally binding clauses and identify potential legal issues your business could face.

Beyond writing the agreement, a lawyer can also assist you in negotiating with your partners. Their mediation skills can be vital in defining your partner's rights and responsibilities.

By consulting a lawyer, you can guarantee that your contract agreement is legally binding and complies with all relevant laws and regulations.

Not Reviewing Your Partnership Agreements Annually

Your business partnership will evolve over time, changing its needs and goals. Your partnership agreement must reflect these changes.

Conducting annual reviews of your agreement will allow you to assess whether its terms and clauses align with your partnership's new objectives.

It also provides the perfect opportunity to address any issues or concerns that have arisen since you last reviewed the agreement.

Skipping Key Details

Most disputes between business partners happen because they forget to discuss a specific matter in their partnership. You should never skip any key details in your partnership agreement.

Take the time to discuss every clause you want to include in the document. Ask your partners for any questions or concerns they have. This way, you can guarantee everyone's on the same page.

Using Vague Terms

Avoid using ambiguous or vague terms when writing your partnership agreements. Such language can lead to misunderstandings, confusion, and even legal disputes later.

Stick with clear and precise wording so all parties fully understand their rights and responsibilities.

Ignoring Tax Implications

Like any other business structure, partnerships have their tax implications. Although the IRS treats most partnerships as pass-through entities, the type of partnership you choose will significantly impact your tax liabilities.

Launch Your Partnership Today

Starting a business alone can be scary, but the good news is that you can partner with another skilled entrepreneur. Collaborating with someone who complements your strengths and helps fill in your weaknesses will make your journey less scary and more fulfilling.

You can leverage each other's skills and expertise to overcome challenges and seize opportunities that may seem impossible.

Find the right partner in NCH, and let us help you start a new partnership today.

NCH is a premier business formation service provider in Nevada. Our team of experts can assist you in forming a successful partnership. Call us at 1-800-508-1729 to schedule a free consultation.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

Book Your FREE
1:1 Business Checkup

In only 15-30 minutes, our business formation experts will meet with you and:

• Evaluate your current business structure and identify areas of improvement
• Find potential problems before they become major issues
• Develop a game plan for improving asset protection and minimizing tax liability
• Reduce your exposure in the event of a business accident

Time slots are limited and fill quickly, so secure your spot now!

---

Speak With a Business Expert

Please fill out the necessary information:

Select a Time (PST)* 9:00 AM (PST) 10:00 AM (PST) 11:00 AM (PST) 12:00 PM (PST) 1:00 PM (PST) 2:00 PM (PST) 3:00 PM (PST) 4:00 PM (PST)

Please fill in the required fields!

By submitting this form, you agree to the Terms and Conditions and Privacy Policy, and that my contact information, including email address, may be shared with the sponsor.

Schedule Consultation