Starting a business can be quite the process, especially if you’re doing it alone. A lot of entrepreneurs join up with other people to start a business in order to share the burden and gather more resources. But you can’t just shake hands and be done with it— turns out, there’s a few different types of partnerships you may want to consider.
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Partnership Business Definition
can get very nuanced, but the gist of them is pretty simple. When two or more people share ownership, profits, and losses of a business, that’s a partnership. How exactly you split the profits, losses, ownership, and liability of the business depends on what type of partnership you choose.
The Main Types of Partnership Businesses
There are three main types of partnerships, each with a different tax status, depending on the state where you register your business. They are relatively common, so consider them first:
General Partnership (GP)
A general partnership is the simplest partnership agreement that you can make. To start with, you don’t have to file for this type of partnership. As soon as you and your partner start working together, a general partnership forms!
However, it’s important to note that while this partnership is low-maintenance, it can be risky. With a general partnership, every partner holds liability for the business, and their personal assets can be considered business assets. This means that you could be held legally responsible if your business harms someone else, and if you’re sued, then your belongings are fair game.
Limited Partnership (LP)
A limited partnership restricts your liability. There still needs to be one general partner, who handles day-to-day operations and can be held entirely liable, but a limited partner can still own a portion of the company. If you are a limited partner, you can only be held liable up to your financial contribution to the company.
This is a good option if you are looking to invest in a company, maybe play a smaller role, but don’t want to run the business yourself. You do have to file for an LP, but that’s a small price to pay for the discounted risk.
Limited Liability Partnership (LLP)
In a limited liability partnership, a partner’s liability is limited, and they cannot be held responsible for the actions of other partners. Individual partners can be held liable for their negligence or wrongful acts, but it will not extend to others in the business. However, every partner retains a “general partner” status. They can all manage the business.
Not all states allow any business to become an LLP. Some states restrict them to doctors, lawyers, accountants, and other formalized professions. If you’re interested in creating an LLP, check your state laws before you file.
Limited Liability Limited Partnership (LLLP)
This is the fourth type of partnership, but it’s not legal in every state. It is very similar to an LLP, but for one important difference. In a LLLP, there are general partners and limited partners— people who control the business day-in and day-out, and people who have limited control over the business. However, in a LLLP, even general partners liability is limited.
Business Partnership Agreement
Having a written, agreed-upon business partnership agreement is one of the best ways to avoid serious conflict later on. This agreement will spell out each partner’s roles and expectations in the business.
These are all crucial points that you need to plan out ahead of time, or you might find yourself at the mercy of whatever your state law declares. While it’s mostly up to you on what to include in the agreement, consider covering the following:
- Division of profits & losses
- Decision-making protocol
- A record of partners’ expected contributions
- How to admit/dismiss a partner
- Detail of partners’ responsibilities
The Small Business Administration has a sample partnership agreement that you can look over.
If you’re planning on starting a business partnership, start from the beginning. Don’t rush into it, and don’t let your partner pressure you into a one-sided arrangement. There is a lot to consider when it goes into planning obligations and liability within your financial future, so take your time.
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