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UNDERSTANDING THE DIFFERENT TYPES OF PARTNERSHIPS

On Behalf of | Aug 12, 2015 | Wang IP Law Blog

In the business world, a general partnership is a form of business that has more than one owner. A general partnership can come with a great deal of liability. All partners in a general partnership are all personally liable for all business debts. For example, a partner in the partnership makes a poor business decision and it results in debt, all partners will be responsible for the actions of that one partner. Each partner also has agency authority, meaning that a single partner can bind the entire business to a contract or business deal. Although a general partnership is easiest to form, there are other business entities that one can form with multiple people that will protect all owners of the business from the liability issues.

Limited Partnership

A limited partnership (LP) is a form of business with more than one owner. Unlike a general partnership in which all parties in the partnership are held liable for all business activities, a limited partnership gives greater protection to the individual owners of the business.

Within a limited partnership, at least one of the owners must be considered a “general partner”. The general partner is responsible for all business decisions made in the company and is held personally liable for all of the business debts. The other investors in the business, known as “limited partners” are not personally liable for any business debts. However, limited partners also have limited ability to make decision on day-to-day business operations.

Limited Liability Partnership

A limited liability partnership (LLP) provides all owners of the business limited personal liabilities. Unlike a limited partnership, all partners of the LLP can participate in general management decisions and have authority in day-to-day operations. However, it is important to note that because the management of the LLP is shared, liability may be shared as well. Generally, a partner’s personal assets will be protected from legal action. However, if a specific partner made an error while in practice, they could be personally liable.

Many professional businesses such as a law firms, medical practices, and accountants use the LLP format as their business entity. As professionals, entering a partnership allows them to expand their resources and lower the cost of business. However, in their line of work, liability issues arise frequently. A LLP allows the business to be generally liable for the contracts that the business enters, however individual partners are not liable for the negligence of another partner.

A LLP is also a flow through entity for taxes, meaning that partners in the LLP must pay taxes individually. This is preferable to a corporation because a corporation is first taxed as an entity, and then its shareholders are taxed individually.

Limited Liability Company

A limited liability company (LLC) is essentially a hybrid that combines the characteristics of a corporation and a partnership. The owners of a LLC, referred to as members, have many options on how to run their business. They can either hire other professionals to run the company for them, much like a corporation, or they can run as a partnership and run business affairs themselves. The flexibility of an LLC is what makes it such an appealing option for small businesses.

A LLC offers protection similar to a corporation. Members of a LLC are protected under the business, often referred to as the corporate veil. They are protected from personal liability for business debts and claims. If the company cannot pay off a creditor, the creditor cannot go after the assets of a member of the company. Only in extreme cases – such as fraud within the company – can a member of a LLC be held personally liable for his actions in the business.

Taxation for a LLC is the same as a LLP. The business income passes on to the LLC owners, who then report their share of profits on their individual income tax returns, and pay taxes accordingly.

Reviewing the advantages and disadvantages of different business partnership entities is necessary in order to select the best option for a particular business business. Having multiple overseers of a company can be beneficial to the growth of a business, but it is extremely important to ensure the protection of personal assets.