A partnership arises when two or more people are co-owners of a business and participate in the profits and losses of the business. Other legal business structures include sole proprietorships, limited liability partnerships (LLCs), corporations, and non-profit corporations.
In a society, each person contributes something to the business such as ideas, money, property, or some combination of these. Management rights, profit sharing, and personal liability will vary depending on which of the three modern forms of partnership the business takes: general partnership, limited partnership, or limited liability partnership (LLP).
Main Types of Business Associations
Below you will find basic summaries of the main types of business associations.
A general partnership involves two or more owners who carry out a business purpose. General partners share the same rights and responsibilities in relation to the management of the company, and any individual partner can bind the entire group to a legal obligation. Each individual partner assumes full responsibility for all business debts and obligations. Although such personal liability is daunting, it carries a tax advantage: the profits of the partnership are not taxed on the business, but pass to partners, who include earnings on their individual tax returns at a lower rate.
A limited partnership allows each partner to restrict his personal liability to the amount of his business investment. Not all partners can benefit from this limitation – at least one participant must accept general partner status, exposing himself to full personal liability for business debts and obligations. The general partner reserves the right to control the business, while the limited partner or partners do not participate in management decisions. Both general and limited partners benefit from business benefits.
Limited Liability Companies (LLP)
Limited Liability Partnerships (LLPs) retain the tax advantages of the general partnership form, but offer some personal liability protection to participants. Individual partners in a limited liability company are not personally liable for the wrongful acts of other partners, or for the debts or obligations of the business. Because the LLP form changes some of the fundamental aspects of the traditional partnership, some state tax authorities may subject a limited liability company to the non-partnership tax rules. The Internal Revenue Service views these businesses as partnerships, however, and allows partners to use the pass-through technique.
Existing associations that wish to take advantage of LLP status do not need to modify their existing association agreement, although they may choose to do so. To change status, a partnership simply files an application for registration as a limited liability partnership with the appropriate state agency. All states require the name of the corporation and principal place of business to be disclosed. Some states also require, among other things, the identification of the number of partners, a brief description of the business, a statement that the partnership will maintain the insurance, and a written acknowledgment that the limited liability may expire.