QUESTION on What is a Partnership: Types of Partnerships
My friend has created his own Greeting Card Business. He is the creator and founder. He wants a partner, and would like me to be it. We both agree on 50-50 partnership. What type of partnerships are out there like joint venture ownership? I want to know all the types of partnerships that are out there and their pros and cons for him and I? We both want this partnership to be 50-50. Thanks. I love this website, thanks for providing me with such a great site!
– Nicole (Florida)
Partnerships come in different flavors, and about the only thing the various types of business partnerships have in common is that each is made up of two or more owners. How you structure your partnership will depend not only on the profit-sharing agreement between you and your friend but also liability and tax issues as they relate to each of you and the particular business.
Common types of partnerships include:
General Partnership –
In a general partnership, all of the partners share equal rights and responsibilities in the management of the business. Likewise, each partner in a general partnership assumes full personal liability for the debts and obligations of the business. And one partner can enter into a contract on behalf of the partnership, making the other partner(s) legally bound to the terms of the contract. The profit of a general partnership passes through to its owners, making it taxable at each partner’s individual income tax rate. (Partnership losses are also “pass-through”, giving each partner the ability to offset taxable income from other sources.)
Limited Partnership –
A limited partnership consists of at least one general partner and one or more limited partners. The general partner, just like in a general partnership, bears full personal responsibility for the debts and obligations of the business. In exchange for this exposure, management and control of the business is reserved to the general partner. The limited partner takes a passive role in the business and in fact does not participate in the management of the business at all. The limited partner’s risk is limited to his or her investment in the business. In short, the general partner and limited partner share only in the profits/losses of the business and nothing more. Limited partnerships, like general partnerships, offer pass-through taxation.
Limited Liability Partnership (LLP) or Limited Liability Limited Partnership (LLLP) –
The availability of this partnership structure depends on individual state laws. Generally speaking, an LLP is the same as a general partnership and an LLLP is the same as a limited partnership in most respects, except that a partner cannot be held liable for the wrongful acts of other partners; and, in some states, the general partners cannot be held responsible for the debts and obligations of the business.
One way to structure a business partnership is through the use of a Limited Liability Company (LLC). An LLC is a legal entity that is formed by filing Articles of Organization at the state level. As the name suggests, a limited liability company provides limited liability protection to its owners (called “members”) in much the same way a corporation does to its shareholders–without the formalities and stringent recordkeeping requirements normally associated with corporations. The members of an LLC are generally not responsible for the debts and obligations of the LLC.
Another great thing about an LLC is the flexibility it allows in allocating ownership interest amongst partners. Ownership interest in an LLC can be divided in any way the partners see fit, regardless of if and how much capital is contributed by each partner. An LLC with two or more members is taxed like a partnership (pass-through taxation) by default. Optionally, an LLC may elect to be taxed as a corporation.
These types of partnerships assume that the parties desire to enter into a partnership for an indefinite period of time. An alternative for persons wishing to enter into a partnership for just one project or business transaction, there is the joint venture. A joint venture functions like a general partnership but is usually structured for one common objective and for a specified period of time. It is not unusual for two companies to enter into a joint venture to provide services for a specific project (e.g. a telecommunications company and a cable TV company might enter into a joint venture agreement to deploy broadband telephone services to a regional market).
You should consult an attorney who can help you sort out the legalities of each type of partnership and provide you with a properly drafted partnership agreement that addresses not only the structure of ownership but also an exit strategy, ie. what happens when one partner leaves (or wants to leave) the partnership. When it comes to partnerships, the exit strategy can be just as critical as the ownership structure itself–always plan for the worst while you hope for the best.
Recommended Books on What is a Partnership and Types of Partnerships:
- Form a Partnership: The Complete Legal Guide
- How to Use Limited Liability Companies & Limited Partnerships
- The Partnership Charter: How To Start Out Right With Your New Business Partnership (or Fix The One You’re In)
- Forming a Partnership : And Making It Work (Entrepreneur Magazine’s Legal Guide)