Types of Business Partnerships

Running a business isn’t as easy as imagining yourself at the top giving commands. More often than not, you would need a partner to share the responsibilities and risks that come with such businesses – majorly because one person doesn’t always possess all the necessary skills or resources.

However, business partnerships are also not as simple as one would think. It’s not as straightforward as just finding someone who’s willing to invest half of their time, money and effort into building a business. There are different types of partnerships, and each comes with its own set of advantages and disadvantages.

Here are some common types of business partnerships based on the legal structure, aspects of decision-making, and how profits and losses are shared.

Type of Business Partnerships Based on Liability and Management

Partnerships are not always 50-50, and there are different types based on the level of responsibility or liability each partner has.

To make things simpler –

Liability refers to the extent to which an individual is responsible for the debts and obligations of a business. In simpler terms, it’s the extent to which a partner’s personal assets are at risk in case of any financial liabilities or legal issues faced by the business. There are usually two types of liability in partnerships – limited and unlimited.

• Limited liability: Partners’ financial responsibility is restricted to their investment in the business. In this case, partners are not personally liable for any business debts beyond the amount invested. For example, if Partner A invested $100,000 in a business but the total debt comes to $200,000, Partner A is only responsible for their initial investment of $100,000.
• Unlimited liability: Partners are personally responsible for all business debts. This means that all their personal assets can be used to cover any financial liabilities of the business. For example, if Partner B invested $100,000 in a business that incurred $200,000 in debt, Partner B would be liable for the full amount of $200,000 irrespective of their initial investment.

Even if it’s a 50-50 partnership, a party should know how does a 50/50 Partnership Agreement work. Does all the parties have same decision-making rights, operational duties, or do one have more responsibilities than others? There are always different liabilities, duration terms, and even partnership decision-making terms.

Based on liability, partnerships can be further divided into four type. Similarly, based on duration, it can further be divided into four other types.

General Partnership (GP) 

A general partnership is one of the simplest and most common types of partnership where two or more individuals agree to manage a business together and share its profits, losses, and liabilities.

The only catch of this type of partnership is that each partner has unlimited liability for any debts or obligations incurred by the business. This means that if one partner makes a mistake and causes financial loss or legal issues, all partners are held equally responsible.

Features of General Partnerships

General partnerships are the epitome of equality – all partners have an equal say in business decisions and are also equally responsible for any consequences. This may sound great, but it can lead to conflicts and disagreements if all partners do not agree on the same course of action.

Some common features of general partnerships include:

• Ease of formation: Unlike corporations, general partnerships do not require any legal paperwork or registration with the government. It can be formed by a simple agreement between two or more individuals.
• Sharing of profits and losses: Unless specified otherwise in the partnership agreement, all partners share an equal percentage of the business’s profits and losses, irrespective of their initial investment amount.
• Equal management rights: All partners have an equal say in decision-making and managing the business.
• Unlimited liability: All the partners have unlimited liability, making them personally responsible for all business debts and obligations.
• Joint and several liabilities: In case one partner is unable to pay their share of the debt, the other partners are responsible for paying their portion as well.
• Legal entity: General partnerships are not considered as separate legal entities from its partners. This means that all the partners are taxed on their share of profits, and the business itself does not pay any taxes.
• Taxation: Profits and losses of the partnership are reported on each partner’s personal tax returns, eliminating the need for a separate business tax return. However, partners may still have to pay self-employment taxes on their share of profits.

Benefits of General Partnerships

Being the simplest and most common type of partnership, general partnerships offer several benefits, such as:

• Shared resources: Partners can pool in their individual resources, skills, and expertise to run the business more effectively.
• Shared decision-making: With all partners having an equal say in decisions, consensus can be reached faster, leading to better management of the business.
• Limited paperwork: Unlike corporations or limited liability partnerships (LLPs), general partnerships do not require extensive legal paperwork or formalities to be completed.
• Tax advantages: General partnerships do not pay taxes on their earnings. Instead, partners report their share of profits and losses in their individual tax returns.

Disadvantages Of General Partnerships

While simple, general partnerships come with their own set of disadvantages, such as:

• Unlimited liability: Partners are personally liable for all business debts and obligations. This means that if the business fails, each partner’s personal assets can be used to pay off any outstanding debts.
• Disagreements and conflicts: The equal management rights of partners can lead to differences in opinions, causing conflicts or delays in decision-making.
• Lack of continuity: General partnerships do not have a perpetual existence and cease to exist if one partner leaves or dies.
• Limited funding: Partners may face difficulties in raising capital as their personal resources primarily fund the business.
• Partner decisions are binding: In a general partnership, each partner is bound by the actions of their fellow partners. If one partner makes a decision that results in legal issues or financial losses, all partners are held equally responsible.

Limited Partnership (LP) 

A limited partnership is a business structure where partners have different levels of liability – one or more general partners with unlimited liability and one or more limited partners with limited liability.

It combines elements of general partnerships and corporate liability protection.

This business structure is defined by having at least one general partner and one or more limited partners, each with distinct roles, responsibilities, and liabilities.

It is different from general partnerships as this type of partnership has two distinct roles of partners –

General Partners: These partners have unlimited liability and are responsible for managing the business operations.

Limited Partners: These partners have limited liability and do not actively manage the business. They usually invest in the business but are not involved in its day-to-day operations.

Features of Limited Partnership

Limited partnerships share some similarities with general partnerships, such as ease of formation and sharing profits and losses. However, it also has distinct features, including:

• Formation requirements: Unlike general partnerships, limited partnerships require a formal registration process with the state government. A written agreement and a filing fee are necessary to form a limited partnership.
• Limited partners’ liability: The biggest difference between general partnerships and limited partnerships is the concept of limited liability. Limited partners have limited liability, which means their personal assets are not at risk in case of business failure.
• General partners’ management rights: General partners retain control over day-to-day operations and decision-making in a limited partnership, unlike corporations where shareholders hold this power.
• Taxation: LPs are treated as pass-through entities for tax purposes, similar to general partnerships. The profits and losses of the business are passed through to individual partners who report them on their personal tax returns.
• Legal Entity: Unlike corporations, an LP doesn’t have a separate legal entity. It is considered as an extension of the partners’ individual assets.

Advantages Of Limited Partnerships (LP)

Limited partnerships are considered better than general partnerships for many reasons, including:

• Limited liability for limited partners: Limited partners are not personally liable for business debts and obligations, providing them with a financial safety net.
• Capital investment opportunities: LPs can attract more investors as they offer the opportunity for limited participation without personal liability.
• Tax benefits: Like general partnerships, LPs do not pay taxes at the entity level. Instead, profits and losses are passed through to individual partners’ tax returns.
• Managerial control: General partners retain control over management and decision-making, unlike corporations, where shareholders have a say in important decisions.
• Limited perpetual existence: Unlike general partnerships, LPs do not dissolve if one partner leaves or dies. From a limited partner’s perspective, this offers more stability and flexibility in the business.

Disadvantages Of Limited Partnerships (LP)

Similar to any business structure, limited partnerships also have some downsides, such as:

• Unlimited liability for general partners: General partners still have unlimited liability for business debts and obligations. This means their personal assets are at risk if the business fails. This can even create conflicts between general and limited partners.
• Control conflicts: The different roles and responsibilities of general and limited partners can sometimes lead to conflicts over decision-making and management control.
• Costly formation process: Unlike general partnerships, which only require a written agreement, limited partnerships need to be registered with the state government. This involves additional paperwork and fees, making it a more costly.
• Limited control for limited partners: Limited partners have no say in the management or decision-making of the business, leaving them with little control over their investment. This can lead to potential conflicts with general partners.
• Tax complexities: LPs are subject to state laws regarding taxation, which can vary from state to state. Differences in tax treatment may result in more complex tax filings for individual partners.
• Legal compliance: LPs must comply with all applicable regulations and filing requirements as a registered legal entity. Failure to do so can result in penalties or even dissolution of the partnership.

Limited Liability Partnership (LLP) 

A limited liability partnership is a hybrid business structure combining partnerships and corporations’ features. It provides a corporation’s limited liability protection while allowing for the pass-through taxation of a partnership.

In simple terms, an LLP is a type of partnership where –

• All partners have limited liability, protecting their personal assets from business debts and obligations.
• Partners can actively manage the business without losing their limited liability protection.

While these features look similar to a corporation, an LLP has fewer formalities, making it a more flexible option for small businesses.

Features of Limited Liability Partnership (LLP)

LLP is one of the most popular business structures for small and medium-sized enterprises (SMEs) due to its unique features, such as:

• Limited liability protection: All partners in an LLP are protected from personal liability for the company’s debts and obligations. This means that if Partner A and Partner B invested $100,000 each in the business, their personal assets are not at risk if the business fails and incurs debts of $300,000.
• Separate legal entity: An LLP is a separate legal entity, meaning it can own assets and enter into contracts in its name. This provides a higher level of protection for partners’ personal assets.
• Pass-through taxation: As with general partnerships and LPs, LLPs are not taxed at the entity level. Instead, profits and losses pass through to individual partners who report them on their personal tax returns.
• Flexibility in management: Unlike corporations, where shareholders have voting rights based on their ownership percentage, all partners in an LLP can actively manage the business without losing limited liability protection.
• Perpetual existence: An LLP’s existence is not affected by changes in partners or their departure from the business, providing more stability and continuity to the company.
• Fewer formalities and compliance obligations: Compared to corporations, LLPs have fewer formalities and compliance requirements, making them easier to manage and maintain.

Advantages Of Limited Liability Partnership (LLP)

An LLP brings in the benefits of a corporation to partnerships, making it a popular choice for SMEs. Some of the advantages of an LLP include:

• Limited liability protection: LLPs offer personal asset protection to all partners, making it an attractive option for risk-averse business owners. For example, if the business is sued, only the LLP’s assets are at risk, not personal assets of individual partners.
• Tax flexibility: An LLP has a pass-through tax structure, similar to partnerships. This means that profits and losses flow through to individual partners’ tax returns, avoiding double taxation (taxes on both corporate and personal levels).
• Equal partnership control: Unlike corporations, where voting rights are based on ownership percentage, all partners in an LLP have equal say in decision-making and management of the business (unless explicitly mentioned as a clause in the partnership agreement) . This can help avoid conflicts and promote collaboration among partners.
• Limited compliance requirements: Compared to corporations, LLPs have fewer formalities such as annual meetings or board resolutions. This makes it easier for small businesses to manage and maintain an LLP.
• Continuity in business: An LLP’s existence is not affected by changes in partner or their departure. The company can continue to operate even if one partner leaves the business.

Disadvantages Of Limited Liability Partnership (LLP)

While an LLP offers numerous benefits to partners, it also has some drawbacks that need to be considered, such as:

• Personal liability for own actions: While all partners have limited liability protection from the business’s debts and obligations, they are still personally liable for their actions within the company. For example, Partner A may be personally responsible for any negligence claims against him/her.
• Limited investment opportunities: Unlike corporations, where shareholders can easily buy and sell shares, an LLP’s ownership interests are not as easily transferable. This may limit the potential for raising capital or exiting the business.
• Registration requirements: Similar to LPs, LLPs need to be registered with the state government, involving additional paperwork and fees.
• Tax complexities: As with LPs, taxation laws for LLPs vary from state to state and country to country. Partners may have to file taxes in multiple states if the business operates in different locations.
• Potential conflicts among partners: In an LLP, all partners share equal control and decision-making power unless stated otherwise in the partnership agreement. This can lead to potential conflicts between partners over strategic decisions or management styles.

Limited Liability Limited Partnership (LLLP) 

A limited liability limited partnership (LLLP) is a hybrid form of limited partnership that combines the features of an LLP and an LP. It provides limited liability to both general and limited partners, similar to an LLP but also maintains the management structure of an LPwith general partners handling day-to-day operations and limited partners acting as investors.

Features Of Limited Liability Limited Partnership (LLLP):

• Limited Liability Protection: In an LLLP, both general and limited partners have limited liability protection. This means that their personal assets are not at risk for the company’s debts and obligations.
• Separate legal entity: Similar to LLPs, an LLLP is a separate legal entity, providing added protection for partners’ personal assets.
• Pass-through taxation: As with LPs, profits and losses of an LLLP pass through to individual partners who report them on their personal tax returns. This avoids double taxation at both the corporate and personal levels.
• Flexibility in management: General partners handle day-to-day operations while limited partners act as investors. This structure provides flexibility for managing the business while still maintaining limited liability protection for all partners.
• Perpetual existence: An LLLP’s existence is not affected by changes in partners or their departure from the business, providing stability and continuity to the company.
• Fewer compliance obligations: Compared to corporations, LLLPs have fewer formalities and compliance requirements, making them easier to manage and maintain.

Advantages Of Limited Liability Limited Partnership (LLLP)

LLLPs come with their own set of advantages benefiting the real estate industry majorly. But other businesses can also benefit from an LLLP in the following ways:

• Enhanced liability protection: The primary benefit of an LLLP is that it offers limited liability protection to both general and limited partners, making it an attractive option for real estate developers or investors.
• Investment flexibility: Since LLLPs have both general and limited partners, it provides an opportunity for those who want to invest in the business without taking on any management responsibilities.
• Pass-through taxation: As with LPs, profits and losses of an LLLP pass through to individual partners’ tax returns, avoiding double taxation at both corporate and personal levels.
• Continuity in business: Similar to LLPs, an LLLP’s existence is not affected by changes in partner or their departure from the business. This can be helpful for businesses dealing with long-term projects or investments.

Disadvantages Of Limited Liability Limited Partnership (LLLP)

While LLLPs are beneficial for partners and investors, they also have some drawbacks that should be considered, such as:

• Limited investment opportunities: Similar to LLPs, ownership interests in an LLLP are less easily transferable than corporations. This may limit the potential for raising capital or exiting the business.
• Complex legal structure: The hybrid nature of an LLLP can make it more complex to set up and manage than a traditional LP or LLP. It may require additional legal and accounting expertise, which can add to the cost of establishing and maintaining the business.
• Limited availability: Not all states recognize LLLPs and may have specific requirements for formation and operation. This can limit the availability of this business structure in certain locations.

Partnership Types Based on Duration

Even though partnerships are generally seen as long-term business relationships, there are certain types of partnerships based on duration or specific business projects. These include:

• Partnership at Will: This type of partnership does not have a fixed duration and can be terminated by any partner at any time without notice. However, partners must fulfill their obligations to the business before leaving.
• Partnership for a Fixed Term: This type of partnership has a specific duration agreed upon by all partners and may be renewed or terminated at the end of the term. For example, Partner A and Partner B agree to form a partnership for five years.
• Particular Partnership: This type of partnership is formed to undertake a specific business project or venture and dissolves once the project is completed. For example, Partner A and Partner B form a partnership to develop a new software product.
• Sub-partnership: In this type of partnership, existing partners bring in additional partners for a specific project without dissolving the original partnership. The newly added partners are known as sub-partners and have limited rights and responsibilities compared to the original partners. For example, Partner A brings in Sub-partner C for a particular marketing campaign while Partner B remains responsible for managing the day-to-day operations of the business.