Partnerships come in many forms, each with its own advantages and disadvantages. When considering which type of partnership is best for your business, it is important to understand the different types of partnerships and the legal implications associated with each.
In this blog, we will discuss four different types of partnerships and the legal considerations for each.
Owning your own company requires having knowledge in many different areas. Depending on the type of company you own, you need to have a thorough knowledge of what makes it successful.
You need to know how to market yourself. You must keep detailed records of income, expenses, and client lists. Learn how to manage day-to-day activities.
More importantly, you’ll need to know how to legally structure your business to make it profitable for all partners.
How to Determine if a Partnership is Right for You
Facts to consider when deciding whether this is an appropriate structure:
- Can the firm be easily and properly managed by just a few people?
- Will adding more partners expand an existing sole proprietorship?
If either of these factors is present, a partnership entity may make sense. There are issues you need to evaluate to determine if it is the best structure.
A partnership is often less complicated to maintain compared to a corporation. Yet, there are other factors to consider before deciding which structure may be best.
What is a Partnership, and are there Various Types?
A partnership is a business entity or structure involving two or more owners.
Generally, partnerships form when a firm is growing. This does not require the complexity and flexibility provided by a corporation.
There are four basic types available to partners operating as joint ventures.
Each type allows for different levels of personal and financial responsibilities for the partners involved.
The following is a basic overview of the partnerships recognized by Arizona.
1. General Partnership
A General Partnership (GP) forms when 2 or more people agree to operate a company with equal responsibility.
For example, two people are starting a professional home cleaning business. They expect to share the workload and financial responsibilities as an equal team.
In a GP, each partner handles expenses and liabilities and they share the management duties.
A general written agreement drafted by a business lawyer is often enough for a partnership. These are also known as partnership agreements.
2. Limited Partnership
A Limited Partnership (LP) involves one or more of the owners gaining more responsibility. The other partner (or partners) wishes to have limited involvement.
An example is two people who want to start a business. The two share the financial and workload responsibilities equally. They have a third partner who is a financial investor only.
An LP can assure that a partner’s potential for loss cannot exceed the extent of their investment. It can also establish that they are not involved in the day-to-day operation.
As with a GP, a partnership agreement is suggested when forming an LP. The agreement contains details on each partner’s physical and financial responsibility.
3. Limited Liability Partnership
A Limited Liability Partnership (LLP) is like a GP in that all parties share power in the business.
Partners are generally not responsible if another partner acts negligently on behalf of the company.
A partnership agreement protects each partner from liability for the actions of another partner.
4. Limited Liability Limited Partnership
A Limited Liability Limited Partnership (LLLP) is a combination of an LP and an LLP. One or more owners may have more day-to-day responsibility and/or financial investment than others. A negligent act by one partner should not result in liability to other partners.
Because of the complex nature of this type of structure, an agreement that is drafted by an experienced business lawyer is strongly recommended.
Partnerships must file a separate tax return with the IRS regarding the income, expenses, gains, and losses of the firm.
The liability for taxes owed goes to the people listed on the agreement, not the company.
If one partner fails to hold up their end of the financials, the remaining partners may be responsible for all financial obligations.
Different types of partnerships allow for partners to have varying levels of authority of their additions and liability. To protect each partner involved, a business law attorney will draft a partnership agreement.
Management Structure Requirements
Partners can solely manage and operate their business. No formal meetings are required. This can make the management of partnerships easier.
If a business is growing at a rapid pace, a change from a partnership to a corporation can help. This will help owners better manage their workload. The help of qualified board members can aid in this effort as well.
What Else Should I Know About Partnerships?
There are other ways in which partnerships differ from incorporated businesses.
As you decide which type of legal entity is best for you, you may want to consider the following facts:
- Unlike corporations or LLCs, partnerships are not considered separate legal entities. The partners are fully responsible for any financial or legal liabilities.
- All partners are equally responsible for debts incurred by the business. LPs can let specified partners give up management duties for the sake of the business.
- They must follow their specific state’s registration requirements. Contact our office for more information on Arizona’s requirements.
- Partners create a name to file their business under.
Partnerships are easier to create and manage than corporations or even LLCs. There are still important decisions that partners must make before outlining their agreement.
How do I Know if a Partnership is the Right Choice for Me?
A partnership can be a good choice for a firm that is smaller and intends to stay that way for a few years but is operated by more than one person.
It may not be a good fit for a business that is growing or needs the aid of a board of directors.
They do allow for more flexibility in establishing company rules and regulations. Yet, a corporation does help limit the owners’ personal responsibility for business debts and taxes.
There are many reasons why establishing a partnership could be beneficial for you and your partners.
Having a helping hand to walk you through the various avenues of business designation can save you a lot of work, time, and money.
In conclusion, understanding the different types of business partnerships and their associated benefits is key to making an informed decision that will bring mutual benefit to all involved. With the right knowledge and planning, you can ensure that your business partnership will be successful and beneficial for all parties.