Do You Know the Types of Partnership in Business?

Maria Tanski-Phillips Maria Tanski-Phillips

8 months ago

types of partnership
When you start your venture, you have a number of decisions to make. What are you going
to offer? What market are you going to target? Are you going to run your business solo or
have a helping hand? If you don’t want to run your business alone, you might consider
forming a partnership.

Read on to learn about the different types of partnership and how each can benefit your
small business.

Overview of partnerships
One of the first things you decide as a business owner is your type of business structure. As
a brief recap, here are the main business structures you can choose from:

Sole proprietorship
Partnership
Corporation
S corporation
LLC
A partnership is a business that two or more individuals own and operate together. Unlike
other business structures, there are multiple types of partnership you can establish.

The relationship between the partners, type of ownership, and duties of each partner are
typically outlined in a partnership agreement. Depending on the amount of participation in
the partnership, partners may be liable for business debts.

If you’re familiar with partnerships, you’ve likely heard of general and limited partnerships.
However, there are a couple of other forms of partnership out there. Check out the four types
of partnership below:

Limited partnership
General partnership
Limited liability partnership
LLC partnership
Types of partnership in business
Now that you have a little more background information on partnerships, dive into the four
types of partnership in business below.

There are many pros and cons of partnerships. Be sure to weigh the advantages and
disadvantages before you decide which type of partnership is the best route for your
business.

types of partnership
General partnership
A general partnership is a company owned by two or more individuals who agree to run the
business as partners or co-owners.

Unless otherwise agreed, each partner has an equal share of profits and losses. Partnership
agreements play a major role in general partnerships that don’t evenly split duties and
shares.

In general partnerships, partners manage the business and assume responsibility for the
partnership’s debts.

If you plan on forming a general partnership, create a formal agreement stating each
partner’s role and shares. Be sure to also specify how you plan on selling or closing the
business if the partnership dissolves.

Because the business is not a separate entity from its partners, profits in general
partnerships are only taxed at the personal income level. Profits are not taxed at the
company level.

General partnerships are easy to establish, low-cost, and flexible. On the downside, your
personal assets are at risk in a general partnership. Not to mention, partners are liable for
each other’s actions.

Limited partnership
Limited partnerships are more structured than general partnerships and have both general
and limited partners. To start a limited partnership, you need at least one general and one
limited partner. So, what’s the difference between a general partner and a limited partner?

A limited partner is well … limited. Limited partners only serve as investors for the
partnership. Typically, a limited partner does not have decision-making rights. They get
ownership but don’t have as many risks and responsibilities as a general partner.

Limited partners can lose their status if they become too involved in managing the company
(e.g., signing legal documents or contracts). If you’re a limited partner, be careful about the
activities you do and the decisions you make in the partnership.

General partners own and operate the company and assume liabilities for the partnership. A
general partner has control and responsibility when it comes to the limited partnership.

Limited partnerships are generally very attractive to investors due to the different
responsibilities of the general and limited partners.

Limited liability partnership

A limited liability partnership, or LLP, is a type of partnership where owners aren’t held
personally responsible for the business’s debts or other partners’ actions.
With an LLP, you typically can’t lose your personal assets if someone takes legal action
against your business. But, partners can be held liable if they personally do something
wrong.

The protection an LLP partner receives varies from state to state. Check your state’s rules
before you form a limited liability partnership. In some states, only certain professions can
form an LLP, such as lawyers, doctors, or accountants.

LLPs make it easy to add or remove partners. And unlike some other types of partnership,
you can have liability protection from other members’ actions (depending on your state).

LLC partnership
An LLC partnership can have two or more owners, called members. Limited liability
companies with multiple members are referred to as multi-member LLCs or LLC
partnerships.

Under an LLC partnership, members’ personal assets are protected. In most cases,
members can’t be sued for the business’s actions or debts. Members can be held liable for
other members’ actions, though.

Most businesses can form an LLC partnership. LLC partnerships offer personal liability
protection and tax flexibility for members.

Taxing business partnerships

Limited, LLC, and limited liability partnerships are all taxed like a general partnership. All four
types of partnership are pass-through entities.

Pass-through taxation is when the tax “passes through” the business onto another entity,
such as the business owner. Pass-through taxes are only taxed one time. The business
does not pay taxes. Instead, the partners do.

During tax time, a partnership must file the following forms:

Form 1065
Schedule K-1
Form 1065, U.S. Return of Partnership Income, is a form that partnerships use to report their
business’s annual financial information. The form includes information about the company’s
profits and losses, taxes, payments, and deductions.

Use Schedule K-1 (Form 1065), U.S. Return of Partnership Income, to report your
partnership’s income and expenses. Each partner must file their own Schedule K-1. Attach
Schedule K-1 to Form 1065 to report each partner’s share of the business’s income and
expenses.

LLC partnerships, limited partnerships, and general partnerships can choose to be taxed as
corporations. To do so, they must submit Form 8832 to the IRS. LLC partnerships can also
be taxed as an S corporation using IRS Form 2553.
Comparing partnerships: Chart
Phew, a lot of partnership information was just thrown at you. To clear up any confusion
about the different types of partnership in business, check out our helpful chart below.

General Partnership Limited Partnership Limited Liability Partnership LLC Partnership

Number of owners? 2 or more 2 or more 2 or more 2 or more
Type of owner? Partner At least one limited and one general partner Partner
Member
Personal liability protection? No Yes (only limited partners) Yes Yes
Protection from other members’ actions? No Yes (only general partners) Yes No
Who can form one? Anyone Anyone Only certain professions, depending on
the state Anyone
Need an easy way to track your business’s

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HomeBusinessBusiness LawTypes of Partners in a Business Partnership
Types of Partners in a Business Partnership
Table of Contents [show]

Types of Partners in a Business Partnership

Partners are of different kinds in a business partnership. They are as working partner,
sleeping partner, nominal partner, partner by estoppel, limited partner, secret partner,
partner by holding out, sub-partner, partner in profit. They are briefly explained below.

Types of Partners in a Partnership

Types of Partners in a Partnership

1. Working Partner
A Working Partner is one who contributes capital to the business and takes active
part in its management. Hence, he is called active partner.

2. Sleeping Partner
A Sleeping Partner is one who contributes only capital to the business, but does not
take part in its management. He is also called dormant partner or financing partner.

3. Nominal Partner
A Nominal Partner does not contribute capital. Neither does he take active part in the
management. His contribution in a partnership is limited to allowing the other
partners to make use of his name.

4. Partner by Estoppel
Partner by Estoppel is not a partner of the firm but by his words and conduct he leads
the outsiders to believe that he is also a partner of the firm. Usually this
arises, when the outgoing partner fails to give notice about his retirement.

5. Limited Partner
In foreign countries like U.K., the law of the land permits the admission of partners
with limited liability. But in India, no one can be a limited partner. There is only one
exception. The liability of a minor admitted for the benefits of partnership is limited to
the extent of his capital contribution.

6. Secret Partner
A Secret Partner is actually a partner of the firm. But he does not hold out to the
public as a partner of the firm but keeps his existence as secret. His liability is also
unlimited.

7. Partner by Holding Out

Though a Partner by Holding Out is not a partner, he knowingly permits himself to be
a partner of the firm by his activities.

8. Sub – Partner
A Sub-Partner has no direct contact with the firm. He is only next to a partner.

9. Partner in Profit
A Partner in Profit becomes a partner whenever the firm earns profit. His liability is
also unlimited.

Advantages and disadvantages of partnership business◌ঃ-

Advantages of a business partnership

The business partnership offers a lot of advantages to those who choose to use it.

1
Less formal with fewer legal obligations
One of the main advantages of a partnership business is the lack of formality compared with
managing a limited company.

The accounting process is generally simpler for partnerships than for limited companies. The
partnership business does not need to complete a Corporation Tax Return, but you’ll still
need to keep records of income and expenses. A partnership tax return must be submitted
to HMRC and each partner will need to file their own self assessment tax return including
details of their profits from the partnership (as well as any other income).
Unlike a limited company, you don’t need to complete a confirmation statement and the
plethora of other possible Companies House forms that a limited company may need to
submit will never be required for the partnership. There are also fewer records to maintain: in
particular, a business partnership does not need to maintain a set of statutory books like a
limited company has to.

Unless a formal partnership agreement has been drawn up, a partnership business can
easily be dissolved at any time: this gives each partner the freedom to choose to leave if
they wish to.

2
Easy to get started
The partners can agree to create the partnership verbally or in writing. There’s no need to
register with Companies House and registering the business partnership for taxation with
HMRC is quite simple. The partners will also individually need to register for self
assessment, which they can do online.

Although it will take longer and incur additional cost, it’s usually sensible to put in place a
partnership agreement. This documents how the partnership will work, the rights and
responsibilities of partners and what would happen in various possible situations, including if
the partners fundamentally disagree or someone wants to leave.

3
Sharing the burden
Compared to operating on your own as a sole trader, by working in a business partnership
you can benefit from companionship and mutual support. Starting and managing a business
alone can feel stressful and daunting, particularly if you’ve not done it before. In a
partnership, you’re in it together.

4
Access to knowledge, skills, experience and contacts
Each partner will bring their own knowledge, skills, experience and contacts to the business,
potentially giving it a better chance of success than any of the partners trading individually.

Partners can share out tasks, with each specialising in areas they’re best at and enjoy most.
So if one partner has a financial background, they could focus on maintaining the company
books, while another may have previously worked extensively in sales and therefore take
ownership of that side of the business. As a sole trader, by contrast, you’d have to do all of
this yourself (or manage someone you employ to do some of it).

5
Better decision-making
Compared with operating on your own, in a partnership the business benefits from the
unique perspective brought by each partner. In business, very often two heads really are
better than one, with the combined conclusion of debating a situation far better than what
each partner could have achieved individually.

6
Privacy
Compared to a limited company, the affairs of a partnership business can be kept
confidential by the partners. By contrast, in a limited company certain documents are
available for public inspection at Companies House and a company’s shareholders can
choose to inspect various registers and other documents the company is required to keep.

7
Ownership and control are combined
In a limited company, ownership and day to day management of the business is split
between shareholders and directors (although they’re often the same people). That can
mean that directors are constrained by shareholder preferences in pursuing what they see
as the best interests of the business.

By contrast, in a business partnership, the partners both own and control the business. As
long as the partners can agree how to operate and drive forward the partnership, they’re free
to pursue that without interference from any shareholders. This can make a partnership
business potentially more flexible than a limited company, with the ability to adapt more
quickly to changing circumstances.

8
More partners, more capital
The more partners there are, the more money there may be available from their combined
resources to invest into the business, which can help to fuel growth. Together, their
borrowing capacity is also likely to be greater.

9
Prospective partners
As a sole trader, while you can employ staff, it’s not really possible to bring someone on
board to manage the business alongside you. Employees will always believe you’ll be the
one running the business and good people may be demotivated if they feel, as far as their
own career is concerned, there’s “nowhere to go”.

By contrast, it’s usually possible to admit a new partner into a general partnership. Good
staff may be attracted to the business with the incentive that they could become a partner,
either when they join or at some point in the future.

10
Easy access to profits
In a business partnership, the profits of the business are shared between the partners. They
flow directly through to the partners’ personal tax returns rather than initially being retained
within the partnership. In a limited company, by contrast, profits are retained by the company
until paid out, whether as salaries under PAYE or, with the approval of shareholders, as
dividends.

Disadvantages of a business partnership

While there are lots of benefits of a partnership business, this model also carries a number
of important disadvantages.
1
The business has no independent legal status
A business partnership has no independent legal existence distinct from the partners. By
default, unless a partnership agreement with alternative provisions is put in place, it will be
dissolved upon the resignation or death of one of the partners. This possibility can cause
insecurity and instability, divert attention from developing the business and will often not be
the preferred outcome of the remaining partners.

Even if a partnership agreement is in place, the remaining partners may not be in a position
to purchase the outgoing partner’s share of the business. In that case, the business will likely
still need to be dissolved.

2
Unlimited liability
Again because the business does not have a separate legal personality, the partners are
personally liable for debts and losses incurred. So if the business runs into trouble your
personal assets may be at risk of being seized by creditors, which would generally not be the
case if the business was a limited company.

The partners are jointly and severally liable. As one partner can bind the partnership, you
can effectively find yourself paying for the actions of the other partners. If your partners are
unable to settle debts, you’ll be responsible for doing so. In an extreme example where you
only own 10% of the partnership, if your partners have no assets you might end up having to
settle 100% of the debts of the partnership and need to sell your possessions in order to do
so.

3
Perceived lack of prestige
Like a sole trader, the partnership business model often appears to lack the sense of
prestige more associated with a limited company. Especially given their lack of independent
existence aside from the partners themselves, partnerships can appear to be temporary
enterprises, although many partnerships are in fact very long-lasting.

This appearance of impermanence, and the fact that the partnership’s financials cannot be
independently checked at Companies House, can appear to present more risk. Because of
this, some clients (more so in certain industries) will prefer to deal with a limited company
and even refuse to transact with a partnership business.

4
Limited access to capital
While a combination of partners is likely to be able to contribute more capital than a sole
trader, a partnership will often still find it more difficult to raise money than a limited
company.

Banks may prefer the greater accounting transparency, separate legal personality and sense
of permanence that a limited company provides. To the extent that a partnership business is
seen as higher risk, a bank will either be unwilling to lend or will only do so on less generous
terms.
Several other forms of long-term finance are not available to partnerships. Most importantly,
they cannot issue shares or other securities in exchange for investment in the way a limited
company can.

5
Potential for differences and conflict
By going into business as a general partnership rather than a sole trader, you lose your
autonomy. You probably won’t always get your own way, and each partner will need to
demonstrate flexibility and the ability to compromise.

There will be the potential for differences, large or small, with other partners. These might
relate to:

The strategic direction in which the business should go (or how to get there)
How to handle any number of discrete business issues that may arise
Different views on how partners should be rewarded when they put different amounts of
time, skills and level of investment into the business
Ambition. Some may want to dedicate every waking moment to growing and developing the
business, while others may want a quieter life
Differences might not be evident immediately. Over time, partners’ preferences, personal
situations and expectations may change so the fact they are aligned at the start is far from a
guarantee that cracks won’t appear later.

Disagreements and disputes can not only harm the business but also damage the
relationship between the individuals involved. Conflict can be a major distraction, absorbing
the partners’ time, energy and money.

That’s why is generally advisable to draft a partnership agreement (sometimes called a deed
of partnership) when forming the business partnership. This document ensures the partners’
respective rights and responsibilities are enshrined, and that there is a common
understanding of the procedures to be followed in the case of disputes. If the partnership
needs to be dissolved, the partnership agreement will also detail what then happens.

6
Slower, more difficult decision making
Compared to running a business as a sole trader, decision-making can be slower as you’ll
need to consult and discuss matters with your partners. Where you disagree, time will be
spent negotiating to build agreement or consensus. Sometimes this might mean
opportunities are missed. More often, it will frustrate a partner who has been used to making
all the decisions for their business.

7
Profits must be shared
At a basic level, while a sole trader retains all the profits of their business, those of a
partnership are shared amongst the partners. By default, under the Partnerships Act 1890,
profits are shared equally, although that position can be amended by a partnership
agreement.
Sharing profits equitably can raise difficult questions. How do you value different partners’
respective skills? What happens when one partner is seen to be putting in less time and
effort into the partnership, but still taking their share of the profits? It’s easy for resentment to
occur if there doesn’t appear to be a fair balance between effort and reward.

8
Personally demanding
Although there’s at least one other person to share the worry and workload with, in a
partnership business the partners still essentially are the business. It can absorb a lot of time
and energy and disrupt your work/life balance, particularly where you end up covering for
other partners who don’t have such a strong work ethic. By contrast, in a limited company it’s
easier for the owners of the business – its shareholders – to appoint directors to manage the
business, at least on a day to day basis.

9
Taxation
Historically, if the business made more than a certain level of profit, individuals could incur
less tax by withdrawing a combination of salary and dividends under a limited company than
they could via partnership drawings. But since changes to the taxation of dividends, this
difference is far less marked.

However, a limited company still often presents more tax planning opportunities than a
business partnership. With the profits earned by the partnership translated to income on the
individual partners, they’re subject to income tax in the financial year in which they are
made. Profits can’t be retained in the partnership to be drawn as income in a later year,
when a partner’s income (and potentially their marginal tax rate) may be lower.

The tax-efficiency of different business structures depends on your personal circumstances.

You should always consult a tax professional, who can offer advice based on your personal
circumstances.

10
Limits on business development
Several of the other disadvantages we’ve looked at combine to restrain the growth of most
partnerships. That won’t worry a lot of businesses with modest expansion expectations. But
for any business looking to achieve massive growth, a combination of unlimited liability, lack
of funding opportunities and a lack of commercial status in the eyes of the world is hardly the
perfect recipe for success.

The lack of legal personality becomes important here too. Without it, the business cannot
own property, enter into contracts or borrow in its own right, difficulties which will become
harder to work around as the business grows.

Options for the partners eventually to exit the business and profit from it can be complicated,
particularly if it’s possible for the departure of one partner at an earlier date to destroy the
business. While it’s possible for one or more partners to sell their share of the partnership
business, exit strategies can be easier to manage within a limited company structure