Key Takeaways

  • There are four main types of partnership business structures: general partnerships (GPs), limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability limited partnerships (LLLPs).
  • Each partnership type offers different levels of liability protection, management control, and taxation flexibility.
  • Partnerships are easy to form but should always include a written partnership agreement to prevent disputes.
  • Choosing the right type of partnership depends on your goals, risk tolerance, and desired control over business operations.
  • Partnerships provide pass-through taxation, but partners are personally responsible for reporting profits and losses.
  • Consulting a business attorney can help ensure compliance and protect your interests when forming a partnership.

Finding information about types of business partnerships, the people typically involved in them, steps to forming a partnership, along with the advantages & disadvantages of various partnerships can be challenging. Partnerships are a common occurrence in the business world, but is one right for you and your business?

Partnership

A partnership is a single business where two or more people share ownership. In a partnership each person contributes to all aspects of the business, sharing the profits and losses of the business as well. The structure of how many people make up the partnership and their individual responsibilities breaks down into three subcategories.

The type of partnership that you choose for your business will impact several important issues, including the personal liability of each partner, how profits will be distributed, and management responsibilities. Learning about the types of business partnerships will help you to choose the option that best meets the needs of your business.

A General Partnership

An association of two or more persons that carry on as the co-owners of a business in order to generate a profit. The default rule is equality between all members and the only way to change this is through a formal written agreement. Each partner possesses an equal voice in management and the authority to act as agent for the partnership. Each partner can be held liable for all debts of the partnership, and for torts committed by other partners within the course of the partnership's business.

A Limited Partnership

A limited partnership is formed by two or more persons, having one or more general partners and one or more limited partners. A limited partner has no voice in the active management of the limited partnership, which is conducted by the general partner(s). Every limited partner's liability is limited to the capital he has contributed to the partnership.

Choosing this type of business partnership will not be beneficial for every partner involved in the business. The general partner, for example, will not receive the same limited liability protections as the limited partners. General partners can be held liable for all the debts of the business. As such, personal assets may be at risk if the partnership is ever involved in a lawsuit.

Whether you are a general partner or limited partner, you will benefit from the profits of your business. Limited partnerships are quite beneficial for individuals that wish to invest in a business but do not want to hold personal liability for the obligations of said business. A limited partner is often referred to as a silent partner because they don't actually have any input in the management of the business. A limited partners only responsibility is investing money in the partnership.

Limited Liability Partnership

Limited liability partnerships (LLP) have much more in common with limited liability companies (LLC) than they do other types of business partnerships. With an LLP, partners will receive the same beneficial taxation provided by a general partnership, and will also be shielded from the debts, and liabilities of the business. In addition, every partner in an LLP will be protected from the actions of other partners.

The best way to understand an LLP is as a combination of a partnership and a corporation. Forming an LLP means you'll enjoy the same liability protections afforded to corporations and will also have the flexible operations that are the main benefit of a partnership. While a partner in an LLP can still be held liable for their own negligent actions, they will not be liable for the actions of anyone else in the business.

It is possible that an LLP will be subject to tax rules that would not normally apply to a partnership. The reason for this is that LLPs have certain characteristics that are not commonly found with other partnerships. Unlike local tax authorities, the IRS does view LLPs as standard partnership. This means these entities can take advantage of pass-through taxation rules, meaning business profits are taxed on partner's personal returns instead of the business being taxed directly.

If you're interested in forming a limited liability partnership and already have an existing partnership in place, you will not need to make any alterations to your partnership agreement. You can, however, modify your partnership agreement if you so desire. The only thing you need to do to establish your LLP is to file an application with your state. When registering your partnership, you will need the name of your partnership and your principal business location. Some states may require additional information:

  • How many partners your business possesses.
  • A business description.
  • A statement indicating your partnership has insurance.
  • A statement acknowledging your partnership's liability status may one day expire.

Personal injury law firms commonly make use of this type of business partnership. Other businesses that can benefit from forming a limited liability partnership include:

  • Accounting firms
  • Architectural business
  • Healthcare practices

Each partner has equal management rights and is an agent for the business. Only the LLP is liable for business obligations. All partners are liable for their own tortious conduct and for those they supervise.

Limited Liability Limited Partnership (LLLP)

A limited liability limited partnership (LLLP) is a relatively new type of partnership business that combines elements of both limited partnerships (LPs) and limited liability partnerships (LLPs). Like a traditional LP, an LLLP has both general and limited partners. However, in an LLLP, both general and limited partners enjoy protection from personal liability for the business’s debts and obligations. This structure allows for the flexibility of an LP while minimizing the risk to partners’ personal assets.

LLLPs are often used by real estate investors, family-owned enterprises, and professional service firms that want to separate ownership from management but maintain liability protection. However, not all states recognize LLLPs, so it’s essential to check your state’s laws before registering this type of partnership.

Key characteristics of an LLLP include:

  • Dual protection: Both general and limited partners are shielded from most personal liability.
  • Management flexibility: General partners can manage daily operations, while limited partners can contribute capital without direct involvement.
  • Pass-through taxation: The business’s income and losses flow through to the partners’ individual tax returns.
  • State-specific formation rules: Some states require filing a limited partnership certificate and an additional statement of limited liability.

Forming a Partnership

To form a general partnership at common law, nothing more than an agreement between two people is needed. Typically, most people put this into a written agreement for legal and operational purposes. To form any other partnership you must file paperwork to register your business with the state, generally done through the Secretary of State's office.

Additionally, you will need to establish and register a business name along with complying with all state regulations. Taxation issues become increasingly complicated as more people are added to a business, making it essential to do legal research on the financials of a partnership to comply with federal/state law.

Steps to Register Different Types of Partnership

Forming any type of partnership requires compliance with state regulations, and the process varies depending on the structure. Here’s an overview of how to form each type of partnership business:

  1. Choose a business name: Ensure your chosen name complies with your state’s naming rules and isn’t already in use.
  2. Draft a partnership agreement: Although not always legally required, a written agreement is crucial to outline ownership, duties, capital contributions, and dispute resolution procedures.
  3. Register the partnership (if applicable):
    • General partnerships usually form automatically when two or more people start doing business together.
    • Limited partnerships (LPs) and LLLPs must file a Certificate of Limited Partnership with the Secretary of State.
    • LLPs require registration and renewal filings to maintain liability protection.
  4. Obtain necessary permits and licenses: Depending on your business activity and location, you may need local or federal permits.
  5. Apply for an EIN (Employer Identification Number): Required for tax purposes and opening business bank accounts.
  6. Comply with ongoing requirements: Some states require annual reports or renewal fees for LLPs and LLLPs.

A well-structured formation process helps prevent legal issues and ensures partners understand their obligations from the start.

Advantages of a Partnership

  • Liability issues within a partnership are much better than a sole proprietor, as you can allocate limited partners with significantly less liability.
  • A partnership disperses the burdens of a business among several people, which typically will also increase the chance of success when resources are pooled together.
  • It is easy to change your legal structure later in the life of a company, and is very easy to form in the beginning.
  • Receiving credit will be easier with two people, rather than just having one person, which means more capital is available for your business.

Taxation in Different Partnership Types

Taxation is a key factor in deciding which type of partnership business is right for you. Most partnerships enjoy pass-through taxation, where the business itself isn’t taxed. Instead, profits and losses are reported on each partner’s individual tax return. This avoids double taxation, which is common in corporations.

However, different partnership types can have varied tax implications:

  • General Partnerships: Income flows through to all partners, who are responsible for self-employment taxes.
  • Limited Partnerships: Limited partners typically do not pay self-employment tax on passive income.
  • Limited Liability Partnerships: LLP partners may have more flexibility regarding self-employment taxes, depending on state laws.
  • Limited Liability Limited Partnerships: Taxed like LPs, but with enhanced liability protection.

Partnerships must also file Form 1065 (U.S. Return of Partnership Income) with the IRS, even though the partnership itself doesn’t pay federal income taxes. Each partner then receives a Schedule K-1, detailing their share of the profits or losses.

Disadvantages of a Partnership

  • The pros of having more people in a business can also complicate decision-making and decrease profits.
  • Liability may be less for limited partners, however, general partners retain full liability among the owners for their own actions, as well as all other general partners.
  • Disagreement between equal sharing partners is one of the biggest reasons company's dissolve.
  • A partner who chooses to leave will be costly, as you will have to value their assets and replace that essential person who has taken on a lot of liability/responsibility.

Common Partnership Disputes and How to Prevent Them

Even with clear advantages, partnerships can experience conflicts if not properly managed. Common issues include:

  • Unequal contributions or workload: Partners may feel one person contributes more time, effort, or capital.
  • Disagreement over business direction: Strategic decisions can stall if partners have differing visions.
  • Profit distribution disputes: Without a clear agreement, dividing earnings can become contentious.
  • Liability exposure: Misunderstandings about personal responsibility for debts or lawsuits can damage relationships.

To prevent disputes:

  • Establish a comprehensive partnership agreement that defines each partner’s roles, profit distribution, and exit strategy.
  • Schedule regular meetings to review performance, strategy, and finances.
  • Include a conflict resolution clause, such as mediation or arbitration, to avoid costly litigation.

Taking these steps helps maintain trust and ensures long-term stability in your partnership.

Should You Form an LLC or a Partnership?

One of the most important factors to consider is whether or not forming a partnership will be more beneficial than establishing a limited liability company (LLC). Recently, LLCs have overtaken general and limited partnerships as the most popular business structure. The main reason for this is that LLCs offer much stronger liability protections than partnerships and are also much easier to run.

For example, in a limited partnership, at least one partner must remain a general partner and this partner will be exposed to liability. No such requirement exists for an LLC. With an LLC, none of the company members need to take place in the day-to-day operations of the business. Instead, members of the LLC can hire an outside manager to run the company.

Partnerships, no matter which type you choose, are much easier and more affordable to establish than limited liability companies. So, if you are interested in investing in a business and want to limit your liability, but don't want to expend the effort needed to form an LLC, a partnership can be an excellent choice.

What to Consider When Structuring Your Business

When you're starting a new business, several important factors must be considered. This includes how your company will be structured. Choosing the correct structure for your business is an important decision and requires weighing several issues, including your startup needs and your business's future growth potential.

Flexibility is an important issue to think about when structuring your business. Where do you see your company in a few years and will the structure you have chosen allow your business to expand in the way that you desire? You should study your business plan and use the information that it contains to structure your business. The structure you choose should support future growth, not hinder your company from expanding.

You should also consider the complexity of any business structure you are choosing. Sole proprietorships and general partnerships are very simple business structures that can be easily formed. Unlike corporations and limited liability companies, they are not subject to many rules and regulations. If you're running a small business, selecting a simple business structure is almost always the best choice.

Personal liability should also be taken into account when structuring your business. With some types of business structures, you'll be completely liable for the debts of your business, and with others you'll receive liability protections that will shield your personal assets from lawsuits filed against your company. Corporations, limited liability companies, limited liability partnerships, and limited partnership all offer liability protections, whereas general partnerships and sole proprietorships provide no protections.

Finally, you need to think about how your business will be taxed. Some business structures offer beneficial pass-through taxation, such as limited liability partnerships, and other structures will subject you to double taxation. Your goal should be to choose a structure that will keep your taxes as low as possible, both at the state and federal level.

Choosing the Right Partnership for Your Business

Selecting the right type of partnership business depends on your specific goals, resources, and risk tolerance:

  • Choose a General Partnership (GP) if you want simplicity and are comfortable sharing full liability.
  • Opt for a Limited Partnership (LP) if you seek investment without shared management.
  • Consider a Limited Liability Partnership (LLP) if all partners want liability protection while remaining active in management.
  • Explore a Limited Liability Limited Partnership (LLLP) if you want LP flexibility with additional protection.

Before deciding, evaluate:

  • Level of control: How much authority do you want in business operations?
  • Risk tolerance: Are you comfortable with personal liability?
  • Long-term goals: Will your business expand or bring in new investors?

Consulting with a business attorney can ensure your chosen partnership type aligns with your strategic and legal needs.

Frequently Asked Questions

  1. What are the four main types of partnership business structures?
    The four types are general partnership (GP), limited partnership (LP), limited liability partnership (LLP), and limited liability limited partnership (LLLP).
  2. Do partnerships pay federal income tax?
    No. Most partnerships use pass-through taxation—profits and losses are reported on each partner’s personal tax return.
  3. What’s the difference between an LLP and an LLLP?
    Both protect partners from personal liability, but an LLLP includes both general and limited partners, while all partners in an LLP share management roles.
  4. Can an LLP become an LLC later?
    Yes, many states allow LLPs to convert to LLCs for greater operational flexibility and liability protection.
  5. Is a written partnership agreement required?
    While not always legally required, a written agreement is strongly recommended to outline roles, profit-sharing, and dispute resolution methods.

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