Starting a business can be a daunting task, but some entrepreneurs may find it easier with a partner. Partners are able to pool their resources together, offer opinions, assist with decision-making, find investors, and so on. Yet, the brilliance of a partner depends on their skillset, and their influence within the company depends on the type of partnership that was formed in the first place. There are six types of partnerships, and each has its own legal advantages and disadvantages.
What is a General Partnership?
A formal agreement where two or more individuals agree to come together for a business purpose. This type of formation is the easiest to setup, but also the riskiest to enter. Additionally, it requires a high level of communication and sense of trust.
Advantages of a General Partnership:
- The ability to combine financial resources.
- Tax Structure – A general partnership has a pass-through tax structure. Henceforth, co-owners receive income and credits on their personal tax returns. Furthermore, co-owners are allowed to deduct business losses from their tax returns.
- Management Structure – Partners can tailor how they manage the business to their own liking.
Disadvantages of a General Partnership
- Unlimited liability is the main disadvantage of a general partnership. Thus, if one partner makes a poor financial decision, both partners are held responsible.
- Asset Protection is Non-Existent – Since co-owners are liable for all business transactions, their property can legally be seized if they’re unable to pay off each other’s business debts.
- Lawsuits –Again, if one partner makes a mistake, both can be sued, and their personal finances may be endangered because of it.
- Legal Agreements – If one partner signs a contract, the other must also fulfill its terms regardless of their involvement.
What is a Limited Partnership?
Also called an LP, this type of agreement is where only general partners manage the business and take on unlimited liability. The other partners have limited involvement in the business and are not allowed to partake in decision-making or the managerial process.
Advantages of LP:
- Liability protection for limited partners. Limited partners are only responsible for their investments, while general partners have complete legal responsibility over the business.
- Pass-Through Tax Structure, as stated above.
- Shareholders and Investor Opportunities – General partners can acquire as many investors as they’d like to increase capital. Again, investors are only liable for their contributions.
Disadvantages of LP:
- The biggest disadvantage is for the general partner who takes on unlimited liability and must submit extensive paperwork for LPs.
- Limited partner roles – The biggest risk for limited partners is unintentionally getting involved in the managerial process and losing their status as a limited partner.
What is a Limited Liability Partnership?
Also called an LLP, this is a combination of a partnership and corporation where all partners have limited liability.
Advantages of LLP:
- Personal Asset Protection – Limited liability businesses are separate legal entities from the partners involved, so partners’ assets are protected, even if the business has debts.
- Pass-Through Tax Structure
- Role Flexibility – Limited liability partners choose how involved they’d like to be in management.
Disadvantages of LLP:
- The main disadvantage of an LLP is that it’s limited to members of certain professions like doctors, lawyers, architects, and accountants.
What is a Limited Liability Limited Partnership?
Also called an LLLP, this type of agreement is similar to an LP, but general partners have some liability protection.
Advantages of LLLP:
- Some liability protection for general partners.
Disadvantages of LLLP:
- An LLLP is only recognized in the following states: 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, and Wyoming.
- An LLLP won’t work for businesses that operate multiple locations and some of those locations are located outside of states stated above.
Ultimately, if you’re unsure of what type of partnership is best for you, it’s best to contact an attorney for legal advice and guidance.
*Please note, that this article is meant for informational purposes only and is not intended as legal advice.