Types of Partnerships
There are multiple types of partnership, including a general partnership, limited partnership, limited liability partnership, and joint venture.
A general partnership arises when two or more individuals carry on a business activity with the intent of sharing profits. By default, general partners share equal rights and responsibilities in connection with management of the business and split any business profits equally. Of course, these default rules can be changed through a partnership agreement.
An important downside to a general partnership is that the partners are personally liable for any tort or contract liability of the business. This is scary for partners, as any general partner can bind the entire group to a legal obligation or create tort liability for the business. Although such personal liability is daunting, it comes with a tax advantage. Partnerships are not taxed directly. Any business profits pass through the business entity to the partners equally or as designated in a partnership agreement.
A limited partnership is a special type of partnership that must be registered with the state. It is made up of at least one general partner and at least one general partner. The rules governing the general partners are the same as those in a general partnership. The limited partners, however, enjoy special rights and are subject to specific limitations. The limited partner cannot take part in any business operations or decision making. This is the role of the general partner. If the limited partner takes an active management role, then she is automatically converted to general partner status. A limited partner has limited personal liability for the torts and contract obligations (debs) of the business. Her potential liability is limited to the value invested in the business; her personal assets are protected.
Limited Liability Partnerships (LLP)
Limited liability partnerships (LLP) are another special entity form authorized by many states. An LLP must be registered with the state and disclose the names of all limited partners. The limited liability partnership is similar to a partnership, but each partner is limited in their personal liability for the torts or contractual obligations of the business or the other partners. Most states restrict the LLP entity status to service professionals, such as doctors, lawyers, accountants, architects, etc. States generally require that the partners maintain professional liability insurance for each service provider.
Joint ventures are similar to general partnerships. The primary difference is that a joint venture exists solely for the execution of a single business objective, such as a specific business project. The business operations of the two partners are generally separate and there is less integration of effort between the joint venturers. This relationship limited the extent of liability for the acts of the other venturers. Further, it reduces the fiduciary duties among the venturers.
- Note: Joint ventures are normally arrangements between two existing business entities (such as LLC or Corps) that want to work together on a project. Individuals cooperating in this manner will likely be deemed partners.