Owning an operating a business is a dream of many. For some, making this dream a reality means owning a business with others. Whether it is one other person or a group of individuals, creating a partnership might be the best option for your business goals and objectives. As such, it is important to understand this business legal structure and the different types of partnerships available to you.
Creating a partnership
A partnership is established when two or more individuals co-own a business, sharing the profits and the losses. When creating a partnership, each partner contributes to the business. Whether it is money, property, ideas or a combination of these, each partner needs to bring something to the table. However, the management rights, profit share and personal liability of each partner is dependent on the type of partnership formed.
There are three main types of business partnerships. This includes a general partnership, limited partnership and limited liability partnership or LLP.
General partnership
A general partnership is established when two or more owners carry out a business purpose, sharing equal rights and responsibilities with regards to the management of the business. Any partner can bind the entire group to a legal obligation, and each partner assumes full responsibility of the business’s debts and obligations. While it carries with it personal liability concerns, there are tax advantages. Partnership profits are not takes to the business.
Limited partnership
When a limited partnership is created, each partner is able to restrict their personal liability to only the amount they invested in the business. It should be noted that not all partners can benefit from this, as at least one partner must accept general partnership status. As such, they are exposed to full personal liability for the business’s debts and obligations; however, they retain the right to control the business.
Limited liability partnership
Finally, a LLP combines many of the advantages of a general partnership and a limited partnership. It retains the tax advantages of a general partnership and offers the personal liability protection to the participants like a limited partnership. As such, each partner is not personally responsible for any wrongdoings of other partners or the debts and obligations of the business.
Whether you are seeking to create a business partnership or are an existing partnership that wants to modify its existing partnership agreement, it is important to understand your situation and legal options. This will help ensure you are taking the proper steps to protect yourself legally as an individual and a partner. Furthermore, it protects the interests of the partnership.