There are two types of partnerships: general partnerships and limited partnerships. Learn more about their pro's and con's to decide which is best for you:

Advantages of a General Partnership:

  • A partnership is a business relationship between at least two or more persons who join together to carry on a business or trade.
  • Each partner contributes money, property, labor or skills to the enterprise and in exchange receives a share of the partnership’s profits and losses.
  • Partnership agreements can be oral, but a written partnership agreement is the preferred formation document.
  • The partnership agreement specifies the terms of how the partnership will operate, the purpose of the partnership, how decisions will be made, when distributions will be made, etc.
  • By default, each partner has an equal right to participate in the management and control of the business.
  • The partnership files an informational only annual income tax return, and all profits and losses of the business will pass to the personal income tax returns of the partners.
  • Partners are not considered employees of the partnership.
  • Partnerships are easy to form and do not require formal document filings as a corporation or a limited liability company.

Disadvantages of a General Partnership:

  • Partners are held personally, jointly and severally liable for all the business debts of the partnership, regardless of the percentage of ownership in the business.
  • Upon the death, withdrawal, disability or resignation of any partner, the partnership by default will terminate.
  • All money or property contributed to the partnership becomes an asset of the partnership.
  • All profits are shared with the partners.

Advantages of a Limited Partnership:

  • The general partners deal with the day-to-day management of the business, and do not need to consult with or involve the limited partners for most business decisions.
  • The profits and losses flow through the business to the partners, and pass to the personal income tax return of each partner.
  • A limited partner's liability for the debt’s of the partnership is limited to the amount of money or property the limited partner contributed to the partnership.
  • Limited partners can leave or be replaced without the partnership being dissolved.

Disadvantages of a Limited Partnership:

  • Partners are held personally, jointly and severally liable for the business debts of the partnership.

Advantages of a Limited Liability Partnership:

  • One partner is not responsible or liable for another partner's misconduct or negligence.
  • Although it varies from state to state, the partners have a form of limited liability protection from debts of the business similar to that of shareholders in a corporation.
  • Each partner is responsible only for the amount of money he/she has contributed to the partnership.
  • All partners may be involved in the management of the business.
  • Like an LLC, a partnership files an informational only annual income tax return, and all profits and losses of the business will pass to the personal income tax returns of the partners.

Disadvantages of a Limited Liability Partnership:

  • Some states restrict the types of professions that may form a limited liability partnership.

Conclusion

A partnership is a relationship between two or more persons who join together to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. A partnership is typically considered a pass through entity for taxation purposes. Most forms of partnerships, although not all, don't afford personal liability protection from the debts of the business.

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