There are many ideas and issues to cover when it comes to the different kinds of business partnerships. In this post, we will dive a bit further into the various types of partnerships which exist. Many people assume that all ‘partnerships’ are interchangeable. But the truth is that there are numerous separate types of partnerships, and these different options provide different pros and cons for businesspeople. Let’s explore these options in a bit of detail.
A general partnership (GP) is the easiest type of partnership to form. Whenever two or more people come together and conduct business in a cooperative, coordinated fashion, they have formed a GP. A general partnership does not require filing formation documents with the state, nor does it require an operating agreement, trade name registration, or other similar documents. However, general partnerships will still need to acquire licenses or permits when necessary. The primary benefit of GPs is the low burden of formation. Beyond this, GPs also offer tax flexibility, as GPs can elect to be taxed as a corporation, or as a pass-through entity.
The big downside of general partnerships is that partners are personally liable for any debts or obligations of the business. What’s more, partners can be held liable even if another partner engages in wrongdoing. If one partner is sued, but can’t pay the debt, then the remaining partners may be sued in order to satisfy the debt. This is true even if the other partners are not at fault.
A limited liability partnership (LLP) is a type of partnership which offers liability protection for the members. This means that members generally cannot be held personally liable for debts incurred by the business. However, partners may be held personally liable if they are found to be negligent, or commit wrongdoing, or are found guilty of malpractice. This is the primary benefit of an LLP. LLPs also have good management flexibility. Partners can decide among themselves how much they wish to be involved in running the company, and these decisions can be formalized in an operating agreement.
LLPs are only available for certain professions in some states. So, in some states, only physicians, lawyers, or other professionals may form an LLP. LLPs can only be taxed as partnerships, and so members cannot elect to taxed otherwise.
A limited partnership (LP) is an entity which consists of two different kinds of partners: limited partners and general partners. Limited partners are partners who invest financially in the company, but do not play a role in managing or running the company. General partners, on the other hand, are partners who actually play a role in running the company.
An LP must have at least one limited partner and one general partner. Limited partners are not personally liable for business debts in an LP; however, general partners may be held personally liable. This is why LPs are considered attractive options for investors. However, limited partners also have to accept the fact that they have no decision-making power when it comes to the business.
If you’re interested in learning more, or are considering establishing a partnership, reach out to an experienced lawyer today.