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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:
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You have a shared financial commitment. You can pool resources, expertise, and strengths. There are limited startup costs.
without the need for the limited partnership to be dissolved.• There are few formalities (mostly applicable licenses). just like in a general partnership. If each partner takes on a defined role and there is general agreement on the business plan. The general partner. In short. and state requirements with limited . like general partnerships. a partnership can be advantageous. offer pass-through taxation. Limited partners can leave the business or be replaced. The limited partner takes a passive role in the business and in fact does not participate in the management of the business at all. management and control of the business is reserved to the general partner. bears full personal responsibility for the debts and obligations of the business. In the end. make key decisions. Advantages of a Limited Partnership: • • • It is easier to attract investors as limited partners. Work can get done more quickly. and manage the business. and future vision for the business. the success of such an endeavor depends largely on the personalities of the parties involved. there most certainly will be disagreements in management plans. Partners are personally liable for business debts and liabilities. At some time. Disadvantages of a General Partnership: • • • • • • Partners may have different visions or goals for the business. and having several partners involved will increase the potential of acquiring resources and attracting backers. There may also be personal disputes. and visions from the outset. General partnerships can be less expensive and require less paperwork and formalities than a corporation. There may be unequal commitment in terms of time and finances. the general partner and limited partner share only in the profits/losses of the business and nothing more. General partnerships can thrive when each partner brings a specific strength to the business. This arrangement allows for general partners to use their expertise. Limited partnerships. but the partnership agreement is a key element and should be drawn up with due diligence on the part of all parties. Each partner may also be liable for debts incurred. decisions made. and actions taken by the other partner or partners. goals. In exchange for this exposure. Disadvantages of a Limited Partnership: • There are more filings. operational procedures. formalities. Limited Partnership A limited partnership consists of at least one general partner and one or more limited partners. The limited partner's risk is limited to his or her investment in the business.
g. Advantages of Limited Liability Partnerships . An LLC with two or more members is taxed like a partnership (pass-through taxation) by default. and. the exit strategy can be just as critical as the ownership structure itself--always plan for the worst while you hope for the best. One way to structure a business partnership is through the use of a limited liability company (LLC). As the name suggests. Limited Liability Partnership (LLP) or Limited Liability Limited Partnership (LLLP) .The availability of this partnership structure depends on individual state laws. the general partners cannot be held responsible for the debts and obligations of the business.• partnerships. what happens when one partner leaves (or wants to leave) the partnership. an LLC may elect to be taxed as a corporation. The members of an LLC are generally not responsible for the debts and obligations of the LLC. and gains as they see fit. regardless of the equity interest of a specific partner. This. Another great thing about an LLC is the flexibility it allows in allocating ownership interest amongst partners. can be attractive to prospective investors. It is not unusual for two companies to enter into a joint venture to provide services for a specific project (e. When it comes to partnerships. too. a telecommunications company and a cable TV company might enter into a joint venture agreement to deploy broadband telephone services to a regional market). i. except that a partner cannot be held liable for the wrongful acts of other partners. General partners assume personal liability. in some states. an LLP is the same as a general partnership and an LLLP is the same as a limited partnership in most respects. An LLC is a legal entity that is formed by filing Articles of Organization at the state level. losses. 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. Optionally. regardless of if and how much capital is contributed by each partner. These types of partnerships assume that the parties desire to enter into a partnership for an indefinite period of time. 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. An interesting aspect of the limited partnership is that partners are able to allocate profits. An alternative for persons wishing to enter into a partnership for just one project or business transaction. there is the joint venture. subject to compliance with tax laws.e. Ownership interest in an LLC can be divided in any way the partners see fit. Generally speaking. A joint venture functions like a general partnership but is usually structured for one common objective and for a specified period of time.
No Double Taxation . Other states restrict liability. This led to the rapid success of the LLP. limited liability partnerships are taxed directly through the partnership. That means each partner is responsible only for the amount of money he has given or promised to the partnership. offer limited liability for partners. who then make executive decisions for the company. • • • Limited Liability . are included. Disadvantages of Limited Liability Partnerships • • • Some Personal Liability . By combining aspects of partnerships and corporations. every state and the District of Columbia allow them. Traditionally. or LLPs." By limiting liability to partnership liability. now. such as attorneys. Some Restrictions . Corporations also may have company directors doing more mundane.Some states restrict the types of professions that may form a limited liability partnership. professional fields of study. the only money a person suing the partnership could win is partnership money--not a partner's personal savings. Limited liability partnerships. . individuals may be personally responsible for a partner's actions. even for intentional torts--but there may be some situations where personal liability may arise. Liable for Partner's Actions .Limited liability partnerships are relatively new creations that commonly are used for their financial protections.While some states restrict liability of partners in a limited liability partnership. This means that financially. Some states limit limited liability to these traditional fields. Management . and each partner is not "personally liable. being a member of a limited liability partnership may be less secure than merely being a shareholder of a corporation. shareholders hold stock in the company and elect a board of directors. some states limit liability only for negligent civil wrongdoings ("torts") but allow personal liability for intentional torts or criminal actions. In a corporation. With a general partnership. Limited liability partnerships avoid the unnecessary extra steps by allowing each partner to directly own or control a portion of the partnership. daily business.The partnership will be liable for actions taken by a partner in furtherance of the partnership. limited liability partnerships offer several advantages and disadvantages from both. only a few states allowed them. For example.Limited liability partnerships. This avoids corporate double taxation.The ability to directly manage a partnership is a significant advantage of a limited liability partnership. not surprisingly. In the early 1990s. architects and accountants.Unlike corporations. limit the amount that may be recovered in a lawsuit to partnership assets alone. some do not. This makes limited liability partnerships more secure and less financially risky than a partnership. where income from a corporation and distributed profits are both taxed.