Set up the Best Type of Partnership for Your Business

A partnership type of business involves two or more individuals coming together to combine their resources, skills, or assets to jointly build and manage a business. In this arrangement, the partners share both the profits and losses, making it a collaborative way to achieve business goals. Understanding the different types of partnerships available can help you choose the best fit for your entrepreneurial venture.

Why Choosing the Right Type of Business Partnership is Crucial

Selecting the most suitable type of business partnership is a critical decision for any entrepreneur. There isn’t a universal solution, as the ideal partnership depends on your specific business needs and goals. Each type of partnership in business comes with its own set of benefits, risks, and requirements. That’s why it’s essential to carefully evaluate your options to determine what is the best type of business partnership for your situation.

Oracle Legal Group is here to guide you through the complexities of choosing the right partnership type of business. Our team can help you define the various forms of partnerships, so you can make an informed choice that aligns with your business vision.

1. General Partnership (GP)

A General Partnership is the simplest and most common form of partnership. It’s often considered the default option when two or more individuals decide to start a business together.

Ease of Creation and Dissolution

A General Partnership is the easiest and cheapest type of Partnership to form. It can immediately start without State filing of any documents. As long as two or more persons decide to conduct business together, even without any written instrument, they can immediately do so!

Of course, because it’s the easiest type to create, it is also the easiest to dissolve. When one of the Partners leaves or dies, the entire General Partnership can be dissolved. The same effect happens if the General Partnership goes bankrupt. One or some of the remaining Partners may still want to continue the Partnership though, and if you find yourself in this type of situation, give us a call.

Costs of Operation and Management

No State filing means no fees. This type of Partnership is undoubtedly the cheapest to run. However, that doesn’t mean a General Partnership is free to run. Licenses and permits for operation are still required.

As for managing the affairs of the GP, there’s no need to hold annual meetings or there are fewer burdensome regulatory requirements you need to comply with.

We won’t be discussing taxation because you’ll be pretty much taxed the same regardless of the type of Partnership that you have. If you want to know how exactly Partnerships are taxed, send us a message or give us a call, we would be happy to indulge!

Extent of Liability

This is where you might want to reconsider other types of Partnership because a General Partnership offers no liability protection to the Partners. There is direct liability to them and the Partnership has no separate and distinct personality with the persons composing it. Simply put, if the GP is sued, the Partners are sued. If the GP incurs liability, the personal assets of each Partner may be exposed to risk..

2. Limited Partnership (LP)

A Limited Partnership offers a more structured approach by distinguishing between General Partners, who manage the business, and Limited Partners, who act as passive investors.

Ease of Creation and Dissolution

Unlike a General Partnership, this type requires registration of personal information of each Partner. It is then filed with the State and local authorities. Dissolving the Limited Partnership also requires the Partners to file a Statement of Dissolution or Statement of Cancellation, as the case may be.

A Limited Partnership will also require the filing of a Partnership Agreement which is a written contract that outlines the terms and conditions of the Partnership and the rights and responsibilities of each Partner.

Some requirements may have to be filed regularly but there’s also no need to hold annual meetings unlike in a Corporation.

Costs of Operation and Management

General Partners are in charge of the daily operations of the Limited Partnership while Limited Partners are “Silent Investors” who only invest their assets without getting involved in the management of the affairs of the LP.

Extent of Liability

At least one General Partner is required, and s/he has unlimited legal liability like that in a General Partnership. However, if you are looking to avoid direct liability, you can be a Limited Partner and such partner has a separate personality from the partnership and his/her assets may not be exposed to risk should the liabilities of the LP exceed its assets.

This is not, at all, unfair to the General Partner because a Limited Partner can contribute the necessary cash or assets to enable a General Partner to run a business. This way, the latter can assure a person that if s/he can invest in the Partnership without having to worry about the liabilities.

3. Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a specialized type of business partnership designed for professionals like lawyers, accountants, and architects. It provides liability protection while maintaining a flexible management structure.

Ease of Creation

Just like a Limited Partnership, a Limited Liability Partnership is more costly and will require a bit more complexity to create and dissolve than a General Partnership. A Partnership Agreement is a requirement among other things.

Sometimes, additional requirements that are specific to the type of professionals involved may be required by the State, or sometimes, even by Federal Law. Authorities may even require Proof of Permission or an equivalent document from the governing body regulating the practice of the profession of the Partners involved.

Extent of Liability

One of the biggest advantages of an LLP is the liability protection it offers to its partners. Unlike other types of partnerships, partners in an LLP are not personally liable for the business’s debts or legal issues, making it similar to a corporation in terms of risk management.

Understanding the Different Types of Business Partnerships

To choose the best partnership type for your business, it’s essential to understand the different types of business partnerships available:

General Partnership (GP): Easy to form, but with no liability protection.
Limited Partnership (LP): Combines General and Limited Partners, offering liability protection to passive investors.
Limited Liability Partnership (LLP): Best suited for professional services with strong liability protection.

Most Business Partnerships Are Based on Trust and Shared Goals

When forming a business partnership, the foundation is often built on trust, mutual understanding, and a shared vision for the business. It’s crucial to have clear agreements in place, detailing each partner’s roles, responsibilities, and profit-sharing structure to avoid conflicts down the road.

Each type of partnership in business serves a different purpose. The decision should be based on factors such as the level of liability you’re willing to accept, your role in managing the business, and the type of capital investment you can contribute. Evaluating these elements will help you list the different kinds of partnerships available to entrepreneurs and select the best one for your specific business scenario.