To start a business, there are many important factors involved in making some serious decisions in order to choose the right shape of the business structure. It should take time to research your options and understand how each key organizational structure works. This can help you make the best choice for your company. One of the key forms of different business structures is partnerships.
A formal arrangement by two or more parties to organize, operate, and share its profits is called Business Partnership. In this, the parties, called business partners, agree to cooperate to advance their mutual interests. Partnerships can be established in many ways, in some all partners share their liabilities and profits equally, while others may have limited liabilities of partners.
It also has a so-called “silent partner”, in which one party is not involved in the day-to-day business operations. In a broader sense, a partnership can be any joint effort by more than one party. These parties can be governments, non-profit organizations, businesses, or private individuals. The objectives of the partnership also vary widely.
Types of Partnerships
There are three main types of partnerships within a profitable business started by two or more people: General Partnership (General Partnership), Limited Partnership (Limited Partnership), and Limited Liability Partnership (Limited Liability Partnership).
In this, all parties share legal and financial liability equally. Individuals are personally responsible for loans that are taken in partnership, while profits are also distributed equally. The details of profit distribution are almost certainly stated in writing in the partnership agreement.
This is a hybrid of General Partnership and Limited Liability Partnership. For partnership loans, at least one partner must be a general partner with full personal liability. There is at least one silent partner whose liability is limited to the amount of his investment. This silent partner does not usually participate in partnership management or day-to-day operations.
Limited Liability Partnerships (LLPs):
It is a shared structure for professionals, such as accountants, lawyers, and architects. This arrangement limits the personal liability of partners, For example, if one partner is prosecuted for adultery, the other partners’ assets are not at risk. According to some law and accounting firms, There are more divisions between equity partners and salaried partners. Salaried partners have no stake in ownership but are usually given bonuses based on the firm’s profits.
Partnership Being Different from Others
A partnership is a way of building a business, involving two or more people (partners). This includes a contractual agreement between all partners, who set the terms and conditions of their business relationship, including ownership, liabilities, and distribution of profits and losses. The partnership outlines and clearly defines business relationships and liability.
However, unlike Limited Liability Companies (LLCs) or corporations, partners are personally held liable for any business debt of the partnership, Which means lenders or other claimants can go after the partners’ personal assets. For this reason, individuals who want to establish partnerships should be extremely careful when choosing partners.
The Reason for Forming a Partnership
Now the question is, if there is no limited liability of partners, then why should a partnership be formed? Partnerships have many benefits. They are often easier to set up than limited liability companies or corporations and do not involve a formal process of involvement by the government. Corporations and limited liability companies have the added advantage of not being subject to the same rules and regulations. Partnerships are also more tax-friendly.
In limited partnerships (LPs), there are general partners who run the firm’s operations and have full liability, while limited (silent) partners, who are often passive investors or otherwise not involved in day-to-day operations, enjoy limited liability. This is different from a Limited Liability Partnership (LLP).
Partners in limited liability partnerships are not exempt from liability for partnership loans, but they may be exempt from the liability of other partners’ actions. Limited Liability Limited Partnership (LLLP) is a relatively new business form that combines aspects of LPs and LLPs.
For Which Business Is the Partnership Best?
Partnerships are often ideal for a group of professionals who are connected to the same work. Each partner has an active role in running the business. They often include medical professionals, lawyers, accountants, consultants, finance and investment professionals, and architects.