Partnership

A partnership is an arrangement where entities and/or individuals agree to cooperate

to advance their interests. In the most frequent instance, a partnership is formed
between one or more businesses in which partners (owners) co-labor to achieve and
share profits or losses.
Partnerships have widely varying results and can present partners with special
challenges. Levels of give-and-take, areas of responsibility, lines of authority, and
overarching goals of the partnership must all be negotiated. Among developed
countries, business partnerships are often favored over corporations in taxation
policy, since dividend taxes only occur on profits before they are distributed to the
partners. However, depending on the partnership structure and the jurisdiction in
which it operates, owners of a partnership may be exposed to greater personal
liability than they would as shareholders of a corporation.

Common types of partnerships include:

1. General Partnership
2. Limited Partnership
3. Limited Liability Partnership (LLP)

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.) General partnerships
consist of two or more partners who are both responsible for the business. They
share assets, profits, liabilities, and management responsibilities for running the
business. General partnerships are formed by individuals. They are taxed in the same
manner as a sole proprietorship, meaning that each partner includes business income
on his or her personal income tax return. Each partner can also deduct pro rata losses
from the business on his or her own individual tax return. General partnerships
provide a means of raising capital quickly, and can also allow several people to
combine resources and expertise.

Advantages of a General Partnership:

• You have a shared financial commitment.

• You can pool resources, expertise, and strengths.
• There are limited startup costs.
 • There are few formalities (mostly applicable licenses).

General partnerships can thrive when each partner brings a specific strength to the
business. If each partner takes on a defined role and there is general agreement on
the business plan, goals, and visions from the outset, a partnership can be
advantageous. Work can get done more quickly, and having several partners
involved will increase the potential of acquiring resources and attracting backers. In
the end, the success of such an endeavor depends largely on the personalities of the
parties involved. General partnerships can be less expensive and require less
paperwork and formalities than a corporation, but the partnership agreement is a key
element and should be drawn up with due diligence on the part of all parties.

Disadvantages of a General Partnership:

• Partners may have different visions or goals for the business.

• There may be unequal commitment in terms of time and finances.
• There may also be personal disputes.
• Partners are personally liable for business debts and liabilities.
• Each partner may also be liable for debts incurred, decisions made, and
actions taken by the other partner or partners.
• At some time, there most certainly will be disagreements in management
plans, operational procedures, and future vision for the business.

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.

Advantages of a Limited Partnership:

• It is easier to attract investors as limited partners.

• This arrangement allows for general partners to use their expertise, make key
decisions, and manage the business.
• Limited partners can leave the business or be replaced, without the need for
the limited partnership to be dissolved.

Disadvantages of a Limited Partnership:

• There are more filings, formalities, and state requirements with limited
 partnerships.
• General partners assume personal liability.

An interesting aspect of the limited partnership is that partners are able to allocate
profits, losses, and gains as they see fit, regardless of the equity interest of a specific
partner; subject to compliance with tax laws. This, too, can be attractive to
prospective investors.

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, i.e. 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.

Advantages of Limited Liability Partnerships

Limited liability partnerships are relatively new creations that commonly are used for their
financial protections. With a general partnership, individuals may be personally responsible for a
partner's actions. Limited liability partnerships, or LLPs, limit the amount that may be recovered
in a lawsuit to partnership assets alone. This led to the rapid success of the LLP. In the early
1990s, only a few states allowed them; now, every state and the District of Columbia allow them.
By combining aspects of partnerships and corporations, limited liability partnerships offer
several advantages and disadvantages from both.

• Limited Liability - Limited liability partnerships, not surprisingly, offer limited liability
for partners. That means each partner is responsible only for the amount of money he has
given or promised to the partnership, and each partner is not "personally liable." By
limiting liability to partnership liability, the only money a person suing the partnership
could win is partnership money--not a partner's personal savings. This makes limited
liability partnerships more secure and less financially risky than a partnership.
• No Double Taxation - Unlike corporations, limited liability partnerships are taxed
directly through the partnership. This avoids corporate double taxation, where income
from a corporation and distributed profits are both taxed.
• Management - The ability to directly manage a partnership is a significant advantage of
a limited liability partnership. In a corporation, shareholders hold stock in the company
and elect a board of directors, who then make executive decisions for the company.
Corporations also may have company directors doing more mundane, daily business.
Limited liability partnerships avoid the unnecessary extra steps by allowing each partner
to directly own or control a portion of the partnership.

Disadvantages of Limited Liability Partnerships

• Some Personal Liability - While some states restrict liability of partners in a limited
liability partnership, some do not. For example, some states limit liability only for
negligent civil wrongdoings ("torts") but allow personal liability for intentional torts or
criminal actions. Other states restrict liability, even for intentional torts--but there may be
some situations where personal liability may arise.
• Some Restrictions - Some states restrict the types of professions that may form a limited
liability partnership. Traditionally, professional fields of study, such as attorneys,
architects and accountants, are included. Some states limit limited liability to these
traditional fields.
• Liable for Partner's Actions - The partnership will be liable for actions taken by a
partner in furtherance of the partnership. This means that financially, being a member of
a limited liability partnership may be less secure than merely being a shareholder of a
corporation.