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.
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.
Photo courtesy of thinkpanama via Flickr