Partnerships are common opportunities for people who want to do business with two or more other persons. As the world is advancing, the term “Partnership” has been changed in recent years because many new features have been added to the old form of business.
The partnership could be a financial contribution or operational contribution and the partner will be responsible for all or a specific part of the profit and losses.
The most common type of business partnerships are listed here with their pros and cons, this will help you decide what type of partnership to use:
- General Partnership (GP)
- Limited Partnership (LP)
- Limited Liability Partnership (LLP)
- LLC Partnership (Multi-Member LLC)
General Partnership (GP):
It is the most basic form of partnership and there is no need to register or set up a business with the state. Most of the time, two or more partners sign an agreement to form their business. Commonly ownership, profits, and losses are shared equally among different partners but they can impose different considerations in the agreement.
In this type of partnership, all the business partners have the freedom to tie the business with contracts and loans but with that, each partner is also fully responsible for all the company’s debt and legal obligations which means that each partner is responsible for the other partners’ actions as well.
- Easy to Configure and Low-Cost to Operate: Because there is no state registry, you are not required to pay for the establishment of the business nor the ongoing registration fees.
- Corporate Partners: General partnerships can be owned not only by the individuals but by the corporation as well.
- Tax Ease: Partners can claim that they will pay the tax as a company using Form 8832: Entity Classification Identity.
- No Personal Liability Protection: Your personal assets will be at risk if your business is sued.
- Each Partner is Responsible for Other’s Actions: If one of your partners is sued and he cannot pay the damages then you and all other partners will be asked to pay on his behalf.
Limited Partnership (LP):
Limited partnerships are formal business units licensed by the state. This type of partnership has at least one general partner who is fully responsible for the business. In addition to a general partner, there are one or more limited partners who only provide the business with financial contribution but they are not authorized to actively manage the business.
The limited partners only take a portion from the profit and they have nothing to do with the business’ debts and obligations. This partnership guarantees that the limited partner cannot lose money more than his investment.
- Legal Protection for Limited Partners: Limited partners cannot lose money more than their investment and they are not responsible for the company’s debts.
- Decision-making Power for General Partner: General partners have all the decision-making power to manage business activities.
- Corporate Partners: A whole corporation can be a Limited Partner.
- Cannot get Too Involved in the Management: If limited partners start managing the business actively, they may lose the status of limited partners and its protections as well. It means that a limited partner cannot sign legal contracts or make management decisions on the behalf of the business.
- No Legal Protection for General Partners: There is no protection between the personal assets and the business of the general partner.
Limited Liability Partnership (LLP):
LLP works like a general partnership means that all partners actively manage the business activities but limiting responsibility for the actions of other partners. Partners are fully responsible for the business loans, debts, and legal obligations but the difference is that each partner is not responsible for the mistakes and errors of other partners.
LLP is not allowed in all states and is commonly limited to certain professions. The protection of liability you receive under the LLP varies from state to state, therefore it is highly recommended to check the rules and regulations of the state before creating a Limited Liability Partnership.
- Each Member is not Responsible for Others’ Actions: Depending on the state, the partner who will make the mistake will be responsible for it and no other member will be sued on his behalf.
- Flexibility: Terms and conditions can be set according to your requirement and needs on the agreement and there is huge flexibility to add and remove partners from the partnership.
- Only Available for Limited Professions: Only some approved professions such as doctors, lawyers, and accountants can form LLP.
- No Tax Flexibility.
- Only Individuals can be owners: Corporations cannot own the partnership unlike the other types of partnership.
- Not Recognised in the Other States: LLP will only be recognized in the state where it is formed, other states will not recognize and this is a bad option if your business operates in multiple states.
LLC Partnership (Multi-Member LLC):
LLC partnerships can have one or more owners, the owners are known as the members and this is the reason that name this partnership as multi-member LLC. In an LLC partnership, all the members have a legal shield between their personal assets and the business which means that their personal assets cannot be sued for the actions, debts, or shares of the business.
However, each partner can be held responsible for the actions of another member, especially if they know that the member was negligent or made administrative decisions that led to the lawsuit being dropped.
- Protection for Personal Liability.
- Tax Flexibility: Tax classification can be changed to an S-Corporation or C-Corporation.
- Corporate Member: Corporation can be a member of the LLC.
- No Professional Restriction as Anyone can Form LLC.
- Members can be held responsible for the mistakes and actions of the other partnership members.
How do I Pay for myself as a Member/Partner?
As you are a partner of a small portion of the profit, you can pay yourself as an owner’s draw but the amount of money you can take will depend on the business profits and terms and conditions of the agreement. If your partnership as a company or S Corp does not pay taxes, you cannot pay yourself as a W-2 employee. Do keep this fact in mind that you will have to pay taxes on your portion of profit even if you don’t take money out of the business.