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Archive for 03/12/2011

Business Entity: Partnerships

 This is the second part of a four-part blog series


Partnerships are formed when two or more people carry on as co-owners of a business for profit.  Partnerships are often formed with nothing more than a hand-shake.  However, responsible partners will seek to have their partnership arrangement memorialized in a partnership agreement with an attorney.

How Partnerships are Managed

The partner that has the majority of the percentage of the business generally rules.  The other partners go along with the majority owner.  Partnerships do not require formal meetings of their partners like corporations do.  Overall, the management and administrative operation of partnership is relatively simple.  Like sole proprietorships, partnerships often grow and graduate to LLC or corporate status.

Varieties of Partnerships

There are several varieties of partnerships and they range from the general partnership to the limited liability partnership.

The General Partnership

The standard partnership, by default, is call the general partnership.  General partnerships are the simplest of all partnerships.  In a general partnership, all partners share in the management of the entity and share in the entity’s profits.  Matters of running the business are decided by the majority of the partners. All partner’s are responsible for the liabilities of the general partnership.

The Limited Partnership

The limited partnership is more complex than the general partnership.  The limited partnership is owned by two classes of partner; general partners manage the enterprise and are personally liable for its debts: limited partners contribute capital and share in the profits but normally do no participate in the management of the enterprise.

Limited partnerships seem to be on the edge of extinction because of the limited liability company.  Both the Limited partnership and the limited liability company share partnership-style taxation and partnership-style management but the LLC offers greater liability protection because it extends liability protection to all of its managers. 

The Limited Liability Partnership

Another form of partnership is the limited liability partnership.  A limited liability partnership is one composed of licensed professionals, such as attorneys, accountants, or architects.  The partners in the LLP may enjoy personal liability protection for the acts of other partners, but each partner remains liable for his or her own actions.  State laws generally require a LLP to maintain generous insurance policies or cash reserves to pay claims brought against the LLP.

As you can imagine, the complexity of this form of partnership is full of legalities and are best covered by a qualified attorney.

Advantages of the Partnership

  • Owners can start partnerships relatively easily and inexpensively
  • Partnerships do not require annual meetings and require few ongoing formalities
  • Partnerships offer favorable taxation for smaller businesses
  • Partnerships often do not have to pay minimum taxes that are required of LLC’s and corporations

 Disadvantages of the Partnership

  • All owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business (except in the cases of limited partnerships and limited liability partnerships)
  • Individual partners bear responsibility for the actions of other partners
  • Poorly organized partnerships and oral partnerships can lead to disputes among owners

 Note:  An S-Corp is considered a corporation with different tax liabilities


Next up:  Limited Liability Company (LLC)

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