What business organization consists of an association of two or more persons who carry on as co-owners a business for a profit?

When you start your venture, you have a number of decisions to make. What are you going to offer? What market are you going to target? Are you going to run your business solo or have a helping hand? If you don’t want to run your business alone, you might consider forming a partnership.

Read on to learn about the different types of partnership and how each can benefit your small business.

Overview of partnerships

One of the first things you decide as a business owner is your type of business structure. As a brief recap, here are the main business structures you can choose from:

• Sole proprietorship
• Partnership
• Corporation
• S corporation
• LLC

A partnership is a business that two or more individuals own and operate together. Unlike other business structures, there are multiple types of partnership you can establish.

The relationship between the partners, type of ownership, and duties of each partner are typically outlined in a partnership agreement. Depending on the amount of participation in the partnership, partners may be liable for business debts.

If you’re familiar with partnerships, you’ve likely heard of general and limited partnerships. However, there are a couple of other forms of partnership out there. Check out the four types of partnership below:

1. Limited partnership
2. General partnership
3. Limited liability partnership
4. LLC partnership

Types of partnership in business

Now that you have a little more background information on partnerships, dive into the four types of partnership in business below.

There are many pros and cons of partnerships. Be sure to weigh the advantages and disadvantages before you decide which type of partnership is the best route for your business.

General partnership

A general partnership is a company owned by two or more individuals who agree to run the business as partners or co-owners.

Unless otherwise agreed, each partner has an equal share of profits and losses. Partnership agreements play a major role in general partnerships that don’t evenly split duties and shares.

In general partnerships, partners manage the business and assume responsibility for the partnership’s debts.

If you plan on forming a general partnership, create a formal agreement stating each partner’s role and shares. Be sure to also specify how you plan on selling or closing the business if the partnership dissolves.

Because the business is not a separate entity from its partners, profits in general partnerships are only taxed at the personal income level. Profits are not taxed at the company level.

General partnerships are easy to establish, low-cost, and flexible. On the downside, your personal assets are at risk in a general partnership. Not to mention, partners are liable for each other’s actions.

Limited partnership

Limited partnerships are more structured than general partnerships and have both general and limited partners. To start a limited partnership, you need at least one general and one limited partner. So, what’s the difference between a general partner and a limited partner?

A limited partner is well … limited. Limited partners only serve as investors for the partnership. Typically, a limited partner does not have decision-making rights. They get ownership but don’t have as many risks and responsibilities as a general partner.

Limited partners can lose their status if they become too involved in managing the company (e.g., signing legal documents or contracts). If you’re a limited partner, be careful about the activities you do and the decisions you make in the partnership.

General partners own and operate the company and assume liabilities for the partnership. A general partner has control and responsibility when it comes to the limited partnership.

Limited partnerships are generally very attractive to investors due to the different responsibilities of the general and limited partners.

Limited liability partnership

A limited liability partnership, or LLP, is a type of partnership where owners aren’t held personally responsible for the business’s debts or other partners’ actions.

With an LLP, you typically can’t lose your personal assets if someone takes legal action against your business. But, partners can be held liable if they personally do something wrong.

The protection an LLP partner receives varies from state to state. Check your state’s rules before you form a limited liability partnership. In some states, only certain professions can form an LLP, such as lawyers, doctors, or accountants.

LLPs make it easy to add or remove partners. And unlike some other types of partnership, you can have liability protection from other members’ actions (depending on your state).

LLC partnership

An LLC partnership can have two or more owners, called members. Limited liability companies with multiple members are referred to as multi-member LLCs or LLC partnerships.

Under an LLC partnership, members’ personal assets are protected. In most cases, members can’t be sued for the business’s actions or debts. Members can be held liable for other members’ actions, though.

Most businesses can form an LLC partnership. LLC partnerships offer personal liability protection and tax flexibility for members.

Taxing business partnerships

Limited, LLC, and limited liability partnerships are all taxed like a general partnership. All four types of partnership are pass-through entities.

Pass-through taxation is when the tax “passes through” the business onto another entity, such as the business owner. Pass-through taxes are only taxed one time. The business does not pay taxes. Instead, the partners do.

During tax time, a partnership must file the following forms:

Form 1065, U.S. Return of Partnership Income, is a form that partnerships use to report their business’s annual financial information. The form includes information about the company’s profits and losses, taxes, payments, and deductions.

Use Schedule K-1 (Form 1065), U.S. Return of Partnership Income, to report your partnership’s income and expenses. Each partner must file their own Schedule K-1. Attach Schedule K-1 to Form 1065 to report each partner’s share of the business’s income and expenses.

LLC partnerships, limited partnerships, and general partnerships can choose to be taxed as corporations. To do so, they must submit Form 8832 to the IRS. LLC partnerships can also be taxed as an S corporation using IRS Form 2553.

Comparing partnerships: Chart

Phew, a lot of partnership information was just thrown at you. To clear up any confusion about the different types of partnership in business, check out our helpful chart below.

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This is not intended as legal advice; for more information, please click here.

This is a business run by one individual for his or her own benefit. It is the simplest form of business organization. Proprietorships have no existence apart from the owners. The liabilities associated with the business are the personal liabilities of the owner, and the business terminates upon the proprietor's death. The proprietor undertakes the risks of the business to the extent of his/her assets, whether used in the business or personally owned.

Single proprietors include professional people, service providers, and retailers who are "in business for themselves." Although a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. Financial activities of the business (e.g., receipt of fees) are maintained separately from the person's personal financial activities (e.g., house payment).

Partnerships-General and Limited

A general partnership is an agreement, expressed or implied, between two or more persons who join together to carry on a business venture for profit. Each partner contributes money, property, labor, or skill; each shares in the profits and losses of the business; and each has unlimited personal liability for the debts of the business.

Limited partnerships limit the personal liability of individual partners for the debts of the business according to the amount they have invested. Partners must file a certificate of limited partnership with state authorities.

Limited Liability Company (LLC)

An LLC is a hybrid between a partnership and a corporation. Members of an LLC have operational flexibility and income benefits similar to a partnership but also have limited liability exposure. While this seems very similar to a limited partnership, there are significant legal and statutory differences. Consultation with an attorney to determine the best entity is recommended.

Corporation

A corporation is a legal entity, operating under state law, whose scope of activity and name are restricted by its charter. Articles of incorporation must be filed with the state to establish a corporation. Stockholders' are protected from liability and those stockholders who are also employees may be able to take advantage of some tax-free benefits, such as health insurance. There is double taxation with a C corporation, first through taxes on profits and second on taxes on stockholder dividends (as capital gains).

Small Business Corporation (S-Corporation)

Subchapter S-corporations are special closed corporations (limits exist on the number of members) created to provide small corporations with a tax advantage, if IRS Code requirements are met. Corporate taxes are waived and reported by the owners on their individual federal income tax returns, avoiding the "double taxation" of regular corporations.

Advantages/Disadvantages

Sole Proprietorship

• Simplicity of organization-this is the most common form of business organization in the United States because it is the easiest and least expensive to establish.
• Minimum legal restriction-fewer reports have to be filed with government agencies. There are no charter restrictions on operations.
• Ease of discontinuance-the business can be terminated at the will of the owner.
• The owner is truly the boss, making all decisions, keeping all profits, and assuming responsibility for all losses and debts.
• Difficulty in raising capital-this can be a problem since an individual's resources are typically less than the pooled resources of partners.
• Limited life of the business-untimely, unanticipated, or unplanned removal of the proprietor from the operation of the business may have ramifications for creditors.
• Unlimited liability-this is by far the greatest disadvantage to the proprietorship. Even though proprietors may invest only part of their capital in the business, they remain personally liable to the full extent of their assets for the liabilities of the business.

Partnership

• Greater possible capital availability
• Greater resources for decision making, support, creative activity
• Unlimited liability in general partnerships
• Divided authority-having to divide the authority for making decisions among the partners can delay the decision-making process and occasionally lead to disagreement.

Limited Liability Company

• Allow greatest flexibility for customizing the structure of the business
• Limits member liability
• In many states, an LLC may have only one member (have the benefits of a sole proprietorhop but limits liability).
• Requires comprehensive operating agreement because of the high degree of variability/flexibility

Corporation/S-Corporation

• Limited liability to stockholders-liability is limited up to the amount invested personally in the business. In addition, personal assets may not be seized by creditors to satisfy debts (although now creditors often request personal guarantees on business loans).
• Perpetual life-the business continues as a legal entity. Shares in the corporation can be passed on to heirs.
• Ease of transferring ownership-stockholders can sell their shares when they desire, if there is a market.
• Ease of expansion of the company-greater capacity to raise capital by legal sale of stock.
• Government regulation-a corporate charter must be obtained from the state, and the corporation is subject to all state and record keeping regulations that pertain to corporations.
• Costs to organize a corporation are higher.
• Unless permission is obtained from other states, the corporate charter restricts operation to the state where it was issued.
• Double taxation feature unless S-Corporation election is made.