Whether you and your business partner are just starting out or have been working on your ideas for a long time, choosing the right type of partnership can help get things off the ground. Each type of organization has its own pros and cons, primarily relating to personal liability for debts.
Below we break down the three basic types of partnerships, including their advantages and disadvantages.
A general partnership is the only type without any legal or contractual formalities. If two people are jointly operating a business, they are in a general partnership. Each partner is personally responsible for the debts and obligations of the company, but they have the advantage of only paying taxes on profits through their individual tax returns.
Since there are no requirements for a partnership agreement or registration with the state, this setup might appeal to the most fiercely independent among us. However, any disagreements down the line are much harder to solve without an agreement in place.
In a limited partnership, one partner takes on general partner status while others limit their personal liability to the amount of capital they contribute. The general partner is personally liable for business debts, but they also have control over the business. Limited partners are often called “silent partners” because they do not participate in managing the business.
Limited liability partnership (LLP)
All partners in a limited liability partnership are liable only for their own actions. In addition, an LLP offers the same tax advantages as a general partnership – passing profits through to individual tax returns. An LLP is the most common choice for professional practices, including those of attorneys and accountants.
From choosing the right type of organization to drafting the partnership agreement, business owners benefit from the counsel of attorneys experienced in small business law. Take your business to the next level by finding the best type of partnership to suit your needs.