Last Updated on December 6, 2022 by Selina Parker
In the case of a partnership, each partner contributes to its financial and operational elements, so they are personally liable for a portion of the profits and losses.
Business partnerships come in four forms:
1. LLC partnership (also known as a multi-member LLC)
2. Limited liability partnerships (LLP)
3. Limited Partnership (LP)
4. General Partnerships (GP)
For instance, what are the advantages of choosing an LLC over a limited partnership? We will examine how these four types of business partnerships operate and their advantages and disadvantages.
WHAT IS A BUSINESS PARTNERSHIP?
A business partnership is a formal agreement between two or more individuals to collaborate in running a corporation. In addition, it can also refer to an economic or business relationship between two or more people.
The company members contribute money, property, labor, or expertise and share in its profits and losses.
The relationship as a company must frequently register in all jurisdictions where it does business. Each state may have several distinct types of partnerships available to you, so get familiar with them before you file.
HOW DOES A BUSINESS PARTNERSHIP WORK?
A partnership agreement may include individuals working in the business. In contrast, others may consist of partners with limited participation and liability for the business debts or any lawsuits filed against it.
A partnership, unlike a corporation, is not a separate legal entity from its owners. Because the business isn’t separate from the owners for liability purposes, a partnership is similar to a sole proprietorship or an independent contractor business.
Following the partners’ division of profits and losses, each partner pays income tax on their tax return.
TYPES OF BUSINESS PARTNERSHIPS
LIMITED LIABILITY COMPANY (LLC)
Generally, a limited liability company (LLC) has one or more owners called members. An LLC with many members is called a multi-member LLC or LLC partnership.
In an LLC, members have a legal barrier between their assets and the firm, so they are not liable for the firm’s debts or actions. They can, however, be responsible for another member’s actions, especially if they knew that the member acted negligently or made management decisions that led to litigation.
ADVANTAGES OF LLC
Personal Liability Protection: Members are not personally liable for the LLC’s debts or actions, except in cases where they act negligently.
Flexible Corporate Members: A corporation can be a member of an LLC. In other partnerships, only individuals may own, not businesses.
Tax Flexibility: LLCs can choose to change their tax classification from an LLC to an S or C corp, depending on their preferences.
You can be held liable for the negligence of other members.
LIMITED LIABILITY PARTNERSHIP (LLP)
LLPs have no personal liability for the debts and obligations of the business or the conduct of the other partners.
In other words, if someone sues your firm, you won’t lose your assets unless you’ve personally done something wrong. However, if a partner does something wrong or commits malpractice, they may be held responsible.
ADVANTAGES OF LLP
No responsibility towards member’s actions: You have liability protection against any wrongdoings of other partners in the company.
Flexible Management Structure: You can easily add or remove members. Partners can choose the extent to which they want to be involved with its operational and managerial operations, which has no bearing on their responsibility.
Only applies to a particular profession: Only approved professionals such as architects, lawyers and doctors can form an LLC in some states.
No tax flexibility: You have no option to change your tax treatment and status like an LLC
Not allowed for corporations: Only individuals are allowed to own an LLP, not other businesses.
LIMITED PARTNERSHIP (LP)
A limited partnership (LP) is a company where one or more general partners run the organization and are responsible for its decisions. In comparison, one or more limited partners do not participate in the firm’s operations and do not assume liability.
There are two partners in limited partnerships (LPs): general partners and limited partners.
A limited partner doesn’t take part in company decisions, but they usually provide startup funding and cash. They’re sometimes known as “silent partners.”
General partners work with the company’s management and make business decisions.
ADVANTAGES OF LP
Has legal protection: The limited partner is legally protected regardless of the amount of their financial contribution or ownership percentage.
Has the power to make decisions: The general partner maintains control in decision-making while benefiting from the financial contributions of the limited partner.
Can lose their limited partner status: Limited partners who become too involved in the company’s management may lose their limited partnership. Signing legal contracts, making management decisions, and engaging in commercial activities are examples of “becoming too involved.”
A general partnership is the most basic form of a business partnership and exists whenever two or more people agree to go into business together. There are no special requirements to create one, and it can be made informally simply by starting to do business together.
Each partner is legally liable for the company’s debts and activities. When a company is sued or is unable to meet its financial obligations, the partners’ assets are at risk. It also implies that couples are responsible for one another’s behavior.
Cost-efficient and easy to run: Because there is no state registration, you won’t have to pay for the costs of forming a company entity or continuing registration fees.
Tax flexibility: Partnerships are taxable as a corporation by filing Form 8832, Entity Classification Election.
No liability protection: Your assets are vulnerable if your company is sued or has outstanding business obligations.
Liable for each other’s actions: If someone sues your partner, you may also get sued. If your partnership is sued individually but cannot pay the damages, the claimant may also seek to collect from you.
Determining the type of partnership is essential to ensure you are fully protected while running your business. Make sure to familiarize the different kinds of teamwork and the advantages and disadvantages of each before making your decision.
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