Four Common Types of Partnerships

Content

Partnership firms are among the most popular business structures in the US. These entities allow two or more entrepreneurs to combine their skills, expertise, and resources to achieve a single goal.

More importantly, partnership firms are highly flexible. You and your partner can customize roles and responsibilities according to your strengths and contributions.

However, not all partnership firms are created equal. Each type has its own advantages and disadvantages. Understanding these differences is the key to choosing the right entity for your small business.

In this guide, we'll explore the different types of partnership firms you can form to help you decide which is best for you and your business partner.

The Basics of A Partnership

A partnership is a formal arrangement between two or more parties to share ownership and responsibility for a business. This collaborative relationship can take various forms, such as joint ventures, strategic alliances, and partnership firms.

Each party, or "partner," contributes something valuable to the partnership, whether capital or labor. In return, they get a share of the business's profits and losses based on the terms outlined in their partnership agreement.

A partnership agreement is a legally binding document outlining a partnership's terms. It includes key elements, such as:

• Capital contributions.
• Profit and loss sharing.
• Roles and responsibilities.
• Dispute resolution.
• Exit strategies

Written agreements are vital to the success and longevity of any partnership. They ensure that all partners understand their rights and obligations to the business.

Kinds of Partners

Most partnerships comprise two partners: a general partner and a limited partner. The general partner actively manages the business's operations, while the limited partner contributes only capital.

General partners have unlimited liability for the partnership, meaning they can be personally liable for any lawsuit or debt the partnership incurs. Creditors can use a general partner's personal assets to satisfy the business's debts or legal obligations.

In contrast, limited partners have limited liability, meaning they will not be liable for any claims against the partnership. Their exposure to financial and legal risks is limited to their capital contributions.

This distinction significantly impacts the risk and responsibility you will shoulder when you form a partnership.

Types of Partnership Firms

There are four primary types of partnership firms:

General Partnership

General partnerships (GPs) are the simplest form of partnership and can be established once two or more parties agree to operate a business together.

Parties involved in a GP are categorized as general partners, meaning they equally share ownership and liability for the business unless their partnership agreement states otherwise.

GPs are easy to form and maintain. You don't need to file formation documents with your Secretary of State to form a GP or hold annual meetings to maintain one.

Their tax requirements are also relatively straightforward. Since the Internal Revenue Service (IRS) considers GPs as pass-through entities, everything they earn and lose is passed to their partners, who will report these amounts on their personal income tax returns.

Limited Partnership

Limited partnerships (LPs) have at least one general partner and one limited partner.

The general partner manages the business's day-to-day operations, while the limited partner provides funding. This setup allows limited partners to have limited liability for the partnership.

Unfortunately, this also means they have no control over the partnership. A limited partner cannot make decisions on behalf of the business and is not allowed to participate in its management or operations.

Their role is strictly financial, and overstepping could lead to them losing their limited liability status.

Limited Liability Partnerships

Limited liability partnerships (LLPs) are a type of partnership that limits each partner's liability for another partner's misconduct or negligence. This business structure is popular among licensed professionals who need individual liability protections. Examples of this include lawyers, accountants, and doctors.

For instance, if one partner is sued for malpractice, the other partner's assets will be protected from any penalty they may receive.

LLPs typically categorize their partners as equity and salaried partners. Equity partners have an ownership stake in the business and are involved in major decision-making. Meanwhile, salaried partners receive fixed wages and have limited involvement in the firm's management.

Limited Liability Limited Partnership

Limited liability limited partnerships (LLLPs) are relatively new to the market. These entities are considered a hybrid of a GP and LP, offering liability protections to both general and limited partners.

LLLPs can also buy and sell stocks, mutual funds, and bonds like LPs can. Unfortunately, only a handful of states recognize LLLPs. These include:

• 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
• Wyoming

If your state is not on the list, we suggest you look for an alternative entity to form.

Advantages & Disadvantages of Partnerships

Like any other entity, partnerships have their advantages and disadvantages. A business partner can help you pool capital and manage administrative tasks, two of the most common issues small business owners face. Having a partner also means you have emotional support during hard times.

There's no denying that launching a new business can be stressful. You'll face plenty of challenges, some of which can feel overwhelming. But with a trusted partner, you'll have someone to motivate you when the going gets rough.

However, partnerships are not without risks. For instance, you and your partner could have disagreements down the line. Conflicts can arise over differing opinions on managing operations; without a well-written agreement, these disputes could make or break a partnership.

Liability is another disadvantage you must consider. Choosing the wrong type of partnership can leave you and your partner personally liable for the business's financial and legal obligations. So, before you and your friend launch a new startup, consider these advantages and disadvantages carefully.

Conclusion

Partnerships offer entrepreneurs an excellent opportunity to collaborate and achieve a shared goal. However, you must take time to understand the different types of partnerships you can form and their key features. This step will help you determine the best business structure for you and your partner.

A general partnership is a good choice, given its ease of formation and maintenance, but this structure comes with unlimited liability.

If you and your partner want to protect your personal assets from potential business risks, you'll need the liability protections of a limited or limited liability partnership.

Regardless of the type of partnership you choose, your partnership agreement will determine the success of your formal arrangement. If you want your business to grow and thrive, you'll need to create a well-written agreement.

If you need help forming your partnership, don't hesitate to contact NCH. Our business formation experts will guide you through the process and ensure your partnership is built on strong foundations.

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.

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