You can check our previous article about partnership itself on our blog. In this article we try to describe what types of partnerships exist and reasons for choosing each of them.
Types of partnerships
A general partnership (GP) is a business established by two or more owners. It is the default business structure for multiple owners the same way that a sole proprietorship is the default for solo entrepreneurs.
- Ease of creation. No state filing is required. The partnership is created when the partners begin business activities.
- Low cost of operation. Because general partnerships are not formed by means of a state filing, they are not required to pay a formation filing fee, ongoing state fees or franchise taxes. However, the partnership must still obtain the business licenses and permits required for operation.
- Few ongoing requirements. Unlike corporations, general partnerships are not required to hold annual meetings of the owners, issue partnership interest or keep personal assets separate from business assets. Having a partnership agreement that outlines how the partnership will be managed, the roles of each partner, and what events will cause the partnership to end operations is recommended.
Limited partnership (LP) is a type of partnership organization that limits the personal liability of some partners.
- Unlimited liability for general partners only. In a limited partnership (LP), at least one partner has unlimited liability - the general partner(s). The other partners (limited partners) have limited liability, meaning their personal assets typically cannot be used to settle business debts and liabilities. The amount of their liability is limited to their investment in the LP.
- Limited partners are not involved in management. The general partners oversee the day-to-day operations of the LP. Limited partners are basically silent investors.
- Short-term projects/ventures. LPs are often the business type of choice for special situations versus true businesses. For example, films are often formalized as LPs and family estate planning often utilizes LPs.
Limited liability partnership
Limited liability partnership (LLP) is a type of general partnership where every partner has a limited personal liability for the debts of the partnership. Partners will not be liable for the tortious damages of other partners but potentially for the contractual debts depending on the state.
- Professional service businesses. Limited liability partnerships (LLPs) can only be created by certain types of professional service businesses, such as accountants, attorneys, architects, dentists, doctors, and other fields treated as professionals under each state’s law.
- Personal asset protection. The personal assets of the partners in an LLP typically cannot be used to satisfy business debts and liabilities. The LLP does not shield the partners from liability for their personal acts. Put simply, the LLP cannot limit the liability of owners for their own malpractice.
You can always contact our tax advisor. Let us know your question and we will do our best to answer it in the shortest possible time.
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