What are the 4 types of partnership?

Overview: What Is a Partnership?

A partnership is a business jointly owned by multiple individuals.

How Are Partnerships Different from Other Business Entities?

Similar to a sole proprietorship, a partnership is legally and financially inseparable from its owners. Profits and losses are typically passed through to the owners' personal income for tax purposes, along with debts and liabilities.

Partnerships are generally easier and less expensive to establish than corporations. They also provide the benefit of pass-through taxation, often resulting in lower taxes compared to other business structures like corporations.

Types of Partnerships

There are four main types of partnerships:

• General Partnership

A general partnership is the simplest form of partnership and does not require formal registration with the state. Typically, partners establish their business by signing a partnership agreement. Ownership and profits are usually shared equally among partners, but different terms can be outlined in the agreement. In this model, all partners hold the power to bind the business to contracts and loans, and each partner is fully liable for the business's debts and legal obligations. For instance, if one partner takes out a loan that the business can't repay, all partners may be personally liable for that debt. General partnerships are easy to create and dissolve, often terminating automatically if a partner dies or goes bankrupt.

• Limited Partnership

Limited partnerships (LPs) are formal business entities recognized by the state. They consist of at least one general partner, who is fully responsible for the business, and one or more limited partners, who provide capital but do not manage the business. Limited partners invest for financial returns and are not liable for the business's debts. This limited liability means they can share in profits without risking more than their initial investment. However, in some states, limited partners may not qualify for pass-through taxation. If they begin to actively manage the business, they risk losing their limited partner status and its protections. In certain cases, an LP may appoint a limited liability company (LLC) as the general partner to avoid unlimited personal liability, although this option may not be available in all states and is more complex than an LP.

• Limited Liability Partnership

A limited liability partnership (LLP) functions similarly to a general partnership, with all partners actively managing the business, but it limits their liability for each other's actions. Partners are still fully responsible for the business's debts and legal liabilities, but they aren't accountable for the mistakes of their fellow partners. LLPs are not allowed in all states and are often restricted to specific professions, such as doctors, lawyers, and accountants.

• Limited Liability Limited Partnership

A limited liability limited partnership (LLLP) is a newer type of partnership available in some states. It operates like an LP, featuring at least one general partner responsible for managing the business, but it also limits the general partner's liability so that all partners enjoy liability protection. Our office can effectively address any legal questions about partnerships. If you have any questions, please fill out the following form below and a Business Lawyer from our office will get back to you.