Types of Partnerships
Partnerships are an important aspect of business that allow individuals to combine resources, skills, and expertise to achieve common goals. There are several types of partnerships, each with its own characteristics and legal implications. In this article, we’ll talk about the three main types of partnerships: General Partnership, Limited Partnership, and Limited Liability Partnership (LLP).
General Partnership
A General Partnership is the simplest form of partnership where two or more individuals co-own and manage a business. In this type of partnership, the profits, losses, and management responsibilities are shared equally by all partners unless otherwise specified in a partnership agreement.
Characteristics
- All partners are equally responsible for the business’s debts and liabilities. This means that if the business faces financial difficulties, each partner’s personal assets may be used to pay off business debts.
- All partners have an equal say in the business’ decision-making processes, unless a partnership agreement specifies otherwise.
- Partners actively participate in managing the business operations unless they delegate specific responsibilities to others.
- A general partnership is not taxed as a separate entity. Instead, profits and losses “pass through” to the partners and are reported on their personal tax returns.
Advantages
- General partnerships are relatively easy and affordable to set up compared to other business plans.
- Partners can combine their resources, skills, and networks to operate and grow the business.
- Partnerships offer flexibility in management and decision-making processes.
Disadvantages
- Each partner is personally liable for the partnership’s debts and obligations, which can put personal assets at risk.
- Disagreements among partners can arise which may lead to potential conflicts and challenges in decision-making.
- General partnerships may face troubles in obtaining funding compared to other business structures.
Limited Partnership
A Limited Partnership (LP) is a partnership that consists of general partners and limited partners. General partners have management authority and unlimited liability, while limited partners have limited liability and have no involvement in the business’s day-to-day operations.
Characteristics
- These partners oversee the management of the business and have limited liability.
- Limited partners contribute capital to the business but have limited liability and do not participate in management.
- Limited partners are not personally liable for the partnership’s debts beyond their investment, while general partners have unlimited liability.
- Similar to general partnerships, limited partnerships are taxed as pass-through organizations.
Advantages
- Limited partners benefit from limited liability which protects their personal assets from business debts and obligations.
- Limited partnerships can attract investors who want to make financial contributions without taking on management duties.
- General partners have control over the business’s day-to-day operations and decision-making.
Disadvantages
- Limited partnerships may have more complex legal and administrative requirements compared to general partnerships.
- Limited partners cannot participate in managing the business which limits their opinions over the business operations.
A Limited Liability Partnership (LLP), which offers limited liability to all partners while enabling them to actively participate in the management of the business, combines aspects of corporations and partnerships.
An LLP is a type of business structure in which each member bears limited personal liability for the partnership’s debts or claims. Partners in an LLP are not held liable for the actions of other partners. An LLP is usually set up by professionals such as accountants, lawyers, consultants and small businesses who want limited liability.
Characteristics
Limited Liability: All partners in an LLP have limited liability, which protects their personal assets from business debts and liabilities.
Management: Without putting personal assets at danger, partners are free to take an active role in running the company.
Taxation: LLPs are taxed as pass-through entities, meaning profits and losses are reported on partners’ individual tax returns.
Professional Services: LLPs are often used by professionals such as lawyers, accountants, and consultants due to the liability protection and flexibility they offer.
Advantages
- Partners are not held personally liable for the debts and liabilities of the LLP.
- Partners can actively participate in the management of the company without bearing unlimited liability.
- LLPs can improve the professional image of businesses, particularly in industries where specialized services are needed.
Disadvantages
- When compared to general partnerships, LLPs may have more complex formation and registration procedures.
- Regulations governing LLPs vary by state which requires careful compliance with legal requirements.
- While LLPs offer pass-through taxation, partners are still responsible for managing the tax ramifications of income distributions and self-employment taxes.
Each type of partnership offers unique benefits and considerations which allows business owners to choose a structure that aligns with their goals, risk tolerance, and management styles. General partnerships provide simplicity and shared responsibilities, while limited partnerships and LLPs offer varying levels of liability protection and management flexibility. It is essential to understand the characteristics and implications of each partnership type for making wise decisions and establishing successful business ventures.
https://www.ontario.ca/page/business/start/decide-ownership-structure
https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glos
sary/general-partnership
https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-sel
f-employed-income/setting-your-business/partnership.html
https://www.cbc.ca/player/play/video/1.2869043
