What Is the Most Common Type of Partnership and Why

Key Takeaways

• The general partnership is the most common type of partnership due to its simplicity and ease of formation.
• General partnerships involve shared management and unlimited liability among partners.
• Other forms include limited partnerships (LP), limited liability partnerships (LLP), and limited liability limited partnerships (LLLP)—each offering varying degrees of liability protection and management control.
• Partnership agreements are critical for defining roles, contributions, profit distribution, and dispute resolution.
• The type of partnership you choose can impact taxation, liability, and day-to-day operations.

Forms of Business Ownership

There are primarily four forms of business ownership to choose from regarding your company's legal structure. They include:

• Sole proprietorship
• Partnership
• Corporation
• Limited liability company (LLC) or a cooperative

All these structures have advantages and disadvantages you must consider before choosing one for your business.

The Sole Proprietorship Form of Business Ownership

A sole proprietorship is the simplest business structure, owned and operated by a single person. A sole proprietorship can operate under your name or an assumed name. You can't add legal designations of other business structures, like Inc. or Corp., to the name.

The main benefit of a sole proprietorship is how easy and affordable it is to create. In many cases, a sole proprietorship does not require formal registration. In places where you do need to register a sole proprietorship, it is far less expensive than registering other forms of businesses, such as corporations.

Additionally, you don't have to file annual reports or pay taxes on business profits. As a sole proprietor, you file the business income tax with your personal income tax returns, because you and the sole proprietorship are the same. The biggest advantage of owning a sole proprietorship is that it gives you total control and ownership of your business.

However, a sole proprietorship is an extension of its owner under the law, implying that you are fully responsible for the company's debts and liabilities. If your sole proprietorship fails, creditors can come after your personal assets to settle the business debts and obligations. A sole proprietor's personal liability to the business is one of the biggest downsides of operating this form of business. Additionally, a sole proprietorship does not enjoy a flexible tax regime, cannot raise money easily and might suffer from poor management if the owner lacks sound business knowledge.

The Partnership Form of Business

A partnership is the entity created when two or more people decide to co-own a business. If you don't want to bear the burden of running a business alone, a partnership is an ideal business structure. There is no limit to the number of people that can set up a partnership, but there must be at least two partners. Before creating a partnership, it is important to draft a well-thought-out operating agreement that will cover the following:

• Name of the partners and the process of adding new partners or removing them.
• Outline of the company.
• Each partner's percentage of investment and profit.
• How the partnership will be dissolved.

Types of Partnership

Partnerships can be in the form of:

• General partnerships, the most common form.
• Limited partnerships.
• Limited liability partnerships.
• Limited liability companies.

A limited partnership is a business structure in which partners invest in the partnership without having managerial powers in the business. The liability of partners in a limited partnership is proportional to the percentage of their investment in the company. As a limited partner, you cannot participate in the management of the company. Only general partners can hold managerial roles.

The formation of a limited liability partnership is restricted to groups of professionals such as accountants, doctors, lawyers, and architects. A partnership can enter into contracts and take bank loans as a legal entity, making it easier for the business to raise capital. Like a sole proprietorship, a partnership is a pass-through entity. In other words, the company's profits and losses pass directly to the partners who report it on their income tax returns.

Comparison of Common Partnership Structures

Understanding the differences between common partnership types is essential when choosing the right structure:

Each structure affects how much control partners have and how liable they are for business debts, making it essential to match the structure to your business’s risk level and management needs.

Why General Partnerships Are the Most Common

General partnerships are the most common type of partnership because they are easy and inexpensive to form. Unlike limited partnerships or limited liability partnerships, general partnerships typically do not require state registration or extensive legal documentation. This makes them a favored choice among small businesses and family-owned ventures starting out with minimal capital or legal assistance.

In a general partnership:

• Each partner has equal rights in the management of the business.
• Profits and losses are usually shared equally unless otherwise agreed.
• All partners have joint and several liability, meaning each partner can be held responsible for the full amount of any business debt or obligation.

This simplicity makes general partnerships attractive, especially in low-risk industries or among trusted associates.

Disadvantages of Partnerships

The main drawback of partnerships is they do not protect the partners from liability for the business's debts and obligations. Additionally, it can be extremely difficult to dissolve a partnership business if the partners did not agree on a dissolution process from the outset. This makes it critical to have a partnership agreement. If you are not comfortable with the risk of liability that comes with sole proprietorships and partnerships, a corporation might be the best legal structure for your enterprise.

Key Considerations When Choosing a Partnership Type

Before forming a partnership, consider the following factors:

• Liability Exposure: General partners are personally liable, while limited or LLP partners may have protections.
• Regulatory Requirements: Some forms (e.g., LLPs) require registration and adherence to specific professional regulations.
• Flexibility in Management: General partnerships offer equal control, while LPs limit management roles for certain partners.
• Tax Treatment: All partnerships are generally pass-through entities, but tax handling can differ based on how profits are allocated.

Consulting a legal professional to draft a partnership agreement and choose the most suitable type can prevent disputes and financial risks.

Frequently Asked Questions

1. What is the most common type of partnership?
   The general partnership is the most common due to its ease of formation and straightforward management structure.
2. What makes general partnerships risky?
   Each partner is personally liable for business debts, which can affect personal assets if the business fails.
3. How does a limited partnership differ from a general partnership?
   Limited partnerships include both general and limited partners. Limited partners have no management authority and limited liability.
4. Can a limited liability partnership protect personal assets?
   Yes, LLPs provide liability protection for each partner, making them ideal for professional groups like law or medical firms.
5. Do all partnerships require a written agreement?
   While not always legally required, a written partnership agreement is highly recommended to outline roles, contributions, and dispute resolution terms.

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