Businesses have many types in terms of ownership. A single owner can operate a business, or sometimes multiple individuals or organizations put combined effort together to establish a better business. The business partnership concept evolved due to the limitations of sole proprietorship businesses. Before you start a partnership business, you need to have a clear idea about its types, limitations, laws & regulations. No worries! This article is all about a business partnership, and it will help you to understand the concept properly.
What is Business Partnership?
A business partnership is a legal agreement-based relationship formed by two or more individuals or organizations to conduct a business. The partners agree with each other through a formal written agreement or verbal agreement to form the business. According to their agreement, the partners invest their capital in running the business and sharing profits and bear losses among them. They have the right to control the operations and are liable for the actions taken by their business. This concept of business formation is something between a sole proprietorship and a corporation. The owners have unlimited liabilities like the sole proprietors, but they’re multiple in number like a corporation. In some cases, the liability can be limited, which we will discuss in the next part of the article.
4 Types of Business Partnership
General Partnership
A general partnership is the most common type of partnership seen in businesses. This type of partnership is easy to form and least costly to maintain the relationship. There are fewer complications than the other types of business partnerships. It’s a business arrangement that involves two or more people agreeing to share all of its property, earnings, and legal and financial liabilities. When partners start doing business together, they form a general partnership. There is no need to maintain any legal formation procedure. In this kind of partnership, only general partners exist.
A general partnership business is less costly to maintain. No fee needs to be paid to form a general partnership business as no official procedures are involved in creating such relationships. The organization faces fewer obligations in General Partnership business, such as it does not have to hold AGM, EGM, etc., like corporations. Besides, The dissolution of the general partnership is also less complicated. It can be done at any time with the consent of the partners. [1] However, one of the major issues of forming a partnership is the lack of liability protection for the business’s proprietors. When you form a general partnership, all partners have the same responsibilities and liabilities. Usually, a general partnership dissolves when one of the partners dies, becomes incapacitated, or leaves the partnership.
Limited Partnership
A limited partnership (LP) is the type of business partnership of two or more individuals or organizations, but their investment limits the liability of the limited partners. This means they are not liable for the amount that exceeds the money they invested in the business. The “general partner,” who also carries unlimited accountability for the company’s debts and obligations, is the one who manages the business. The general partners take the business decisions, keeping the limited partners informed about those. A limited partnership can have any number of “limited partners.” [2]
Unlike general partnerships, the formation of a limited partnership is complicated and expensive. A limited partnership has few operating formalities, low-to-mid-range administrative costs, and well-defined capital-raising procedures. Also, there are requirements that must be fulfilled in order to form a limited partnership business. There must be at least one partner who has unlimited liability in the business. As a result, a limited partnership must have at least two partners – one limited partner and one general partner. Natural or legal persons, as well as other partnerships, might be included. The number of stockholders has no maximum limit. In most cases, the Limited Partners are not involved in any manner in the management of the corporate entity and/or its assets. The Limited Partners must avoid any involvement in the company’s management at whatever level.
Limited Liability Partnership
Limited liability partnerships (LLPs) are similar to ordinary partnerships in that they include two or more owners, but unlike general partnerships, they provide some of their owners limited personal liability for corporate obligations. The LLP gives limited liability protection to its partners, similar to the limited liability protection given to a company’s shareholders. [3] Internal business rules are also more flexible with LLPs, thanks to partnership arrangements that are comparable to those of a traditional partnership.
LLP partners are paid in the same way as general partners. A portion of the partnership revenues is distributed to each partner. The amount of the draw is determined by the proportion of ownership held by each partner or by a particular allocation to that partner. In every sort of relationship, a partner is always solely responsible for her own acts. Limited liability partners’ liability protection in some states is limited to negligence claims. In such circumstances, the other partners are nonetheless individually accountable for the LLP’s obligations as well as their own willful conduct. LLPs are commonly created to protect partners from liability for their colleagues’ professional mistakes.
Limited Liability Limited Partnership
A limited liability limited partnership is simply a regular limited partnership that has made the decision to convert itself as a limited liability limited partnership. The LLLP must file a Limited Liability Limited Partnership registration with the Secretary of State to get the status. A general partner’s liability is limited as a result of this status. The limited liability limited partnership works and is considered in the same way as a limited partnership, with the exception of liability. [4]
The main benefit of an LLLP is that the general partner is protected from responsibility, which is not the case with an LP. This implies that if a lawsuit is filed against the firm or debts are accrued, and the general partner has no personal liability. In addition, if the other general partners engage in any kind of misbehavior, the general partner who is not guilty is protected from personal culpability. The general partners in a limited liability partnership (LLP) are not personally liable for the business’s liabilities, including debt. The liability protection provided by LLLPs is a key differentiating feature. A general partner in an LP, on the other hand, is required to assume unlimited accountability for the partnership’s obligations.
Partnership Agreement
As per provisions of the partnership law, “Partnership agreement” means the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement. [5] Simply, A partnership agreement is a legal contract among two or more firms or persons who have decided to work together to manage an organization. Typically, each member will provide initial funds, intellectual property, real estate, or industrial space to the company. There are some key provisions that should be included in the agreement. Those are 1. Partnership’s Name 2. Partnership Contributions 3. Allocations – profits and 4. Partners’ Authority and Decision-Making Powers 5. Management 6. Departure or Death 7. Management 8. Dispute Resolution new partners.
A written partnership agreement’s principal legal benefit is that it serves as proof in the case of an internal or external dispute. The flexibility that a partnership agreement provides frequently exposes the participants to particular dangers. Executing a written partnership agreement is the most effective and dependable approach to reduce these risks and safeguard your assets in a partnership.
Should You Go for a Partnership Business?
Forming a partnership brings significant changes to an existing business or to a business that will be formed. It can help your existing business grow by providing the necessary capital, skills, manpower, and other tangible and intangible assets. You should choose this path when you solely cannot operate properly, want to grow your business, and are willing to share the profit & ownership with your partners. But if you consider the unlimited liabilities and other limitations, then you should go for a corporation. On the other hand, if your business is a small one and you want to enjoy all the profit alone, a sole proprietorship would be a better option for you to choose.
Bottom Line
Partnership business is one of the classical business formation types, yet it is popular and compatible to this day. The combined assets and efforts of the partners can make the business highly successful and remove barriers to high growth if it can be operated properly without any significant conflicts. The utmost trust among the partners and related laws & regulations should be followed properly.
References
- General Partnership – Corporate finance institute;
https://corporatefinanceinstitute.com/resources/knowledge/deals/general-partnership/ - Limited Partnership – Investopedia;
https://www.investopedia.com/terms/l/limitedpartnership.asp - Michigan.gov
https://www.michigan.gov/lara/0,4601,7-154-89334_61343_35413_37008—,00.html - United corporate services;
https://www.unitedcorporate.com/limited-liability-limited-partnership/ - https://code.dccouncil.us/us/dc/council/code/titles/29/chapters/6/
Hey Guys! My name is Richard Andrew. I am a contributor to the Strategy Watch. I have finished my graduation with a major in Economics. My interest areas are Economics, Financial Analysis, Stock Analysis, and Business Strategy.