Launching a small business with friends or partners can be exciting, but comes with a lot of responsibility and risk for all parties involved. The partnership business structure exists for this reason.
The two most common partnership type namely general partnership and limited partnership. Although they are often combined, there are key differences to note that will substantially affect how partners participate in running the company, how they benefit from profits, and how they are held accountable for losses.
What’s that? general partnership (GP)?
A general partnership is a business entity consisting of two or more general partners who are responsible for the business. A general partnership is formed through an agreement—both oral and written—between two or more partners who all agree to share the profits, losses, and assets of the company. General partnerships are:
- Default business structure for partners. Like sole proprietorship is the default business structure for individual business owners, general partnership is the default for multi-owner businesses.
- A passing entity. Partners in a general partnership pay taxes on profits at the personal level. Compare this to companywhere profits are double taxed—first at the company level and then at the personal level of the owner.
- Usually the same. Partners in a general partnership take equal personal responsibility for the business. That means equal share of profits and equal liability for debts or legal actions. Partners can adjust profit and liability sharing in their partnership agreement, but equal share is the default.
- Not a shield of obligation. Partners in a general partnership take personal responsibility for the business and cannot protect their personal assets from lawsuits or debts incurred by the business.
What is limited partnership (LP)?
A limited partnership is a business structure similar to a general partnership. However they have additional limited partners who invest in the business but, unlike general partners, are not involved in the day-to-day operations of the business.
How are limited partnerships used?
Limited partnerships are especially true for businesses that have high start-up costs or businesses that typically require investment from many parties.
- Housing area. Limited partnerships are often used in real estate. In such an endeavor, there may be a limited number of partners who provide funds to purchase a piece of property. The general partner may direct the daily maintenance of the property, supervise the tenants of the lease, etc., while the limited partner may only benefit from a portion of the rental income or the final resale of the property.
- private equity. Limited partnerships are also used in private equity. Private equity firms buy portfolios of privately owned companies, work to increase their value, and then (hopefully) sell their holdings for a profit. A limited partner in a private equity context might offer seed funding for a portfolio purchase, while a general partner would be involved in the day-to-day running of the company and the ins and outs of growing the value of the portfolio company.
- Small business. The limited partnership business structure is relevant and applicable to small businesses, especially those with high overhead costs, such as retail businesses. A limited partner may offer investments to purchase inventory and lease storefronts, while a general partner may be in-store day-to-day overseeing operations and making sales.
General partnership vs. limited partnership: Similarities and differences
While general partnerships and limited partnerships share a number of core similarities—namely, the fact that they are partnerships—they differ in many important ways, particularly in terms of the protection of obligations and the role of partners.
Formation
Ownership and management
Profit sharing, liabilities and losses
Tax benefits
Other types of business entities for partners
While general and limited partnerships are the more common options, there are also other partnership structures available to business owners.
Limited liability partnership
A limited liability partnershipor LLP, is a type of business entity that provides personal partners liability protection. Partners in LLP are not responsible for errors or mistakes made by other partners. This makes LLP structures popular with (and usually limited to) law firm, doctors, accountants, and other professionals who are licensed and may face malpractice lawsuits. Unlike a limited partnership, partners in an LLP can oversee the day-to-day affairs of the company while maintaining their shield of liability.
Cooperate partnership
A joint venture partnership is a temporary partnership formed by two or more parties who agree to pool resources for the purpose of achieving certain goals. For example, if you have a coffee shop and adjoining retail space available, but you can’t afford the rent yourself, you could form a joint venture partnership with a bakery or bookstore to acquire the space.
While each partner is responsible for the profits, losses, and costs associated with achieving the goals, a joint venture partnership is its own legal entity. A joint venture partnership is not a separate business entity, but a way to form it. Joint venture partnerships can be in the form of corporations, traditional partnerships, or limited company—and the tax treatment and liability limits of a joint venture partnership will vary depending on the form. If a coffee shop/bookstore joint venture takes the form of an LLC, for example, and a customer injures themselves on site, the joint venture LLC will be responsible for and protect ownership against any legal payments. Parties to a joint venture partnership can be two or more people, companies, or even other partnerships.
Last thought
When considering how to structure a limited partnership, here are some questions for you and your business partner to resolve through research and potential consultation with an attorney:
- How many partners do you plan to include?
- Will all partners be involved in day-to-day operations, or will some partners just be investors?
- Is the general partner willing to take personal responsibility for the business? And the potential fault of each other?
- What are the specific requirements for forming a limited partnership in your country?
- What professional license, if any, do you need to run your limited partnership?