Types of Partnerships
What Are the Types of Partnerships?
When your business has to or more owners, in addition to an LLC, there are two types of partnership entities available: a general partnership or a limited partnership. (A limited liability partnership may also be available, but is generally restricted to certain types of professions or occupations and not a general purpose business.)
What is a General Partnership?
A partnership is an association of two or more persons carrying on a business venture as co-owners for profit. Next to a sole proprietorship, a general partnership is the easiest entity to form under most state laws. Although a formal written partnership agreement is not required to form a general partnership, the partners should ordinarily set forth the rights and duties in a written document. In the absence of a written agreement, however, when two or more people who engage in a business together and do not specifically choose any other entity type, they will be treated as a general partnership if there is an understanding between them that they will share in profits and losses of the business.
No Personal Liability Protection
Each partner in a partnership has personal liability for the obligations of the partnership. General partnerships are limited in their ability to raise capital from outside investors because of the prospect of potential personal liability and the usually limited market for resale of a general partnership interest.
General Partnerships Enjoy Pass-Through Taxation
One of the advantages of a general partnership is that, like a sole proprietorship, the business is not taxed. Rather, income, losses, and gains are passed through to the general partners in accordance with the allocations provided in the partnership agreement. A particular advantage to this form of business is that the partners can agree among themselves as to how income, losses, and gains are divided among the partners.
What is a Limited Partnership?
A limited partnership is a partnership in which the duties and obligations of the partners are divided between one or more “general partners,” and one or more “limited partners.” The formation and operation of limited partnerships are generally regulated under state statutes defining the obligations and duties of partners and imposing other obligations.
Limited Partners Have the Advantage of Limited Liability
A general partner is responsible for managing the partnership and its operations. Like the partners in a general partnership, general partners in a limited partnership are personally liable for all of the partnership’s debts and obligations. A limited partner is usually not personally liable for the partnership’s debts and obligations, but is prohibited from taking part in the partnership’s management and day to day operations. The risk of a limited partner is usually limited to the money or other assets invested in the partnership. As a result, it is far easier to market limited liability partnership interests as an investment, particularly with respect to projects such as a real estate development.
In contrast to a general partnership, a limited partnership requires a written partnership agreement. In addition, a certificate of limited partnership must be filed in the state in which the partnership is formed. Thus, a limited partnership is normally more expensive to form a general partnership.
Partners of a limited partnership are generally taxed in the same way as partners of a general partnership. They are also given the same flexibility to allocate profits, losses, and gains regardless of the percentage of equity interest in the partnership.
What is a Limited Liability Partnership?
A limited liability partnership is an entity that is usually reserved for certain licensed professionals. Each state determines which professionals may form a limited liability partnership, but they typically include attorneys, accountants, architects, and certain medical professionals.
Licensed Professionals Have Some Limited Liability Protection
Limited liability partnerships are partnerships in which the liability of all the partners is limited. Generally the partners in limited liability partnerships are not responsible for the debts, obligations, or liabilities of the partnership resulting from negligence, malpractice or wrongful acts, or misconduct by another partner, employee, or agent of the partnership. However, a partner of a limited liability partnership is liable for other partnership debts and obligations as well as for his or her own negligence, malpractice or wrongful acts, or misconduct, and that of any person under their direct supervision and control.
How a LLP is Formed
Limited liability partnerships are formed by either filing a registration certificate with the Secretary of State, or filing a certificate to convert an existing general partnership to a limited liability partnership. Limited liability partnerships are governed like general partnerships and have a similar degree of management flexibility.