written by | April 20, 2022

What Is the Right Type of Partnership for You?

Business partnerships are relationships formed between two or more people, with or without any legal documentation, to conduct business together and accomplish mutual goals. A partnership is formed between businesses, individuals, or groups of people to increase revenues and profits, provide services to customers, reduce expenses, and many other reasons.

There are many different types of partnerships in business, and each has its advantages and disadvantages. These include:

  • Sole Proprietorship
  • Joint Venture
  • Limited Liability Company (LLC)
  • Corporation
  • Partnership

Did you know?

A registered partnership can be transformed into a Limited Liability Partnership (LLP) or as a Private Limited Company at any time.

What is Partnership in Business?

Business partnerships are an important part of making your business work. You can't do everything on your own, and you won't be able to invest in everything you need upfront, so it's vital to find someone who will contribute their skills and resources to create something great together.

The trouble, though, comes when you try to sort out what kind of partnership is right for you and what you should be looking for from other people who want to partner with you. Here are four different types of partnerships that you might enter into as an entrepreneur and the quality type that each of these has to offer for your business:

  1. General Partnership
  2. Limited Partnership
  3. Limited Liability Partnership
  4. LLC Partnership

Also Read: Primary Aspects of Setting up a Partnership Firm in India

4 Different Types of Partnership in Business

Working with other entrepreneurs and business owners can be extremely beneficial for your company's growth, especially if you choose to partner with the right people who complement your skills and expertise.

By thinking about partnerships in advance and making sure you approach the process strategically, you'll find more success and save yourself time, money, and frustration. 

That's why it's important to think carefully about which kind of partnerships are best suited to your current needs and situations and what sort of partnership makes sense, given your vision for the future of your business.

1) General Partnership

In this type of partnership business model, at least two partners contribute to running the company. A General Partnership (GP) is not registered as a corporation, limited liability company (LLC), or other entity, so all of its owners are personally liable for its debts and obligations.

The partners share equal responsibility for all aspects of running their business. For example, decisions about opening new locations or changing management must be made unanimously.

Unlike a sole proprietorship, each partner's personal assets are equally at risk from lawsuits arising from another partner's actions. In addition, they cannot raise capital by selling shares in their venture unless they file paperwork with state authorities to create legal entities such as corporations and LLCs.

Features of General Partnership

The main features of a General Partnership are that: 

  • All partners are jointly and severally liable for all of their debts. 
  • Each partner is accountable individually for any debt incurred by the company. 
  • This type of partnership does not issue stock or have share certificates. 
  • Although it is possible to maintain some degree of privacy within a Partnership Agreement, it isn't legally enforceable. 
  • If a third party sues your business, they will usually sue both partners individually. For these reasons, most businesses choose to incorporate rather than operate as a General Partnership. 
  • A general partnership is a business organisation in which partners equally share the responsibility for management and profit or liability for losses. 
  • In contrast to other kinds of partnerships, the general partners bear unlimited liability for the company's debt.
  • A general partnership is created by the agreement of the partners. 
  • All the partners can be active in business, whereas some may be inactive. 
  • All the partners need not contribute the same amount to the partnership. 
  • The partnership can be formed even without any capital contribution. 
  • The partnership agreement can provide for the manner of admission of new partners, participation of old partners in profit, subject to their contribution and distribution of profits, and the term and dissolution of the partnership.

2) Limited Partnership

A limited partnership (LP) is a kind of partnership, but it is less flexible. It is a business structure in which one or more general partners manage a business while the other partners are not active participants in the company's management. The partners who do not participate in the management of the company are called passive partners or limited partners.

Limited partnerships are less common than general partnerships. They are typically used in situations where the passive partners do not want to be active and want to limit their liability. The limited partners are not responsible for the debts and liabilities of the business unless they are also active in the management of the business. A limited partnership is a partnership that has limited liability. Many real estate investors use limited partnerships because of the limited liability.

Limited Partner Vs. General Partner

Points of Distinction

Limited Partner

General Partner

1)    Meaning

The partners who have no liability for debts, obligations and losses of the partnership, are called limited partners.

The partners who are liable for the debts of the partnership to the extent of their contribution are called general partners.

2)    Nature of Liability

Liability is limited

There is only unlimited liability for such partners.

3)    Extent of Liability

The limited partners will only be liable up to the amount of their investment.

There is no boundary as to the liability of the general partners. This means that their personal assets would also be liable to pay the debts.

4)    Tax Filing Responsibility

The limited partners only have to pay taxes on their share of income.

The general partner is responsible for filing the partnership tax return. The general partner is also responsible for paying any partnership tax due.

5)    Responsibility in Management

Absence of participation in the company's operations.

The general partner is in charge of making decisions for the company, but can only act within the limits of the partnership agreement.
 

3) Limited Liability Partnership

Two or more partners form LLP. It contains only one kind of member, known as limited, which means that each member only holds one liability instead of unlimited liability. 

A Limited Liability Partnership (LLP) is registered with Registrar or at an authorised body; otherwise, it will be considered illegal. Each Limited Liability Partnership (LLP) has its own tax identification number, so all profit and loss accounts are maintained separately for every LLP.

Features of LLP

Limited liability partnerships (LLPs) are a relatively new business structure. They are a cross between a partnership and a company, with limited liability but without the bother of having to incorporate. So what are the main features of an LLP?

  • It is a contract between two or more people to form a business. One of these people, called the subscribers, enters into an agreement that obliges them to contribute money and skills to the partnership in order to run a business. The subscribers must also agree to share any profits that the business may make. 
  • If the LLP makes a loss, the subscribers are liable for the debts. These people are also partners in the business. 
  • The partners are not personally responsible for their partners' debts if the LLP goes bust. Instead, a limited liability partnership comprises a firm of partners who are not personally accountable for their partners' debts.
  • Limited liability partnerships are quite similar to limited liability companies (LLCs), but there are a few key differences. 
  • Limited liability partnerships are more flexible and are more likely to be used for smaller businesses. 
  • They also offer more flexibility when it comes to taxation. 
  • It is a partnership of two or more individuals with limited liabilities for the other partners. 
  • These partners are limited partners as they have limited liability and are not responsible for the debts or obligations of the other partners. 
  • Partners can be more involved in the business without worrying about paying a debt.

4. LLC Partnership

The last type of partnership is LLC which stands for Limited Liability Company. It is a business structure that offers its members' limited liability protection from the business debts and obligations. 

This means that the LLC business structure is a hybrid between a corporation and a partnership, combining the limited liability protection to owners of a corporation with the pass-through taxation and flexibility of a partnership.

This offers businesses a lot of flexibility in that they can organise and operate the business in similar ways to either a corporation or a partnership.

It is a unique business entity because it is a blend of a corporation and a partnership. The most significant difference between LLC and a corporation is that a corporation has to have a board of directors, which is unnecessary for an LLC. This is also the biggest advantage of an LLC over a corporation.

Also Read: Most Easy Steps in Starting an Import Export Business

Taxing Business Partnerships

Before entering into a business partnership, partners should decide how to divide profits and losses. Partnerships that involve professional services, such as doctors or lawyers, typically require different tax treatment than most other types of partnerships. That's because earnings from these businesses can be subject to taxes on self-employment income. 

Understanding how general partnerships are taxed is essential for all business owners, whether you are an owner of an LLC taxed as an S corporation or just filing your taxes as a sole proprietor or freelancer.

In India, an individual or company can choose to pay taxes as either a sole proprietorship, partnership, or company. This choice will affect both the taxes due and how you need to file your tax returns under the Income Tax Act, 1961.

Partnership firms have particular tax consequences and must pay 30% income tax of total income. In addition, if the total income exceeds ₹ 1 crores, the partnership firm is required to pay an income tax of 12%.

Additionally, the partnership firm must pay for the education cess and the secondary and higher education cess at 2% and 1%, respectively.

The partnership firms have to pay an alternative minimum tax of 18.5% of the adjusted gross income".

In India, every partnership business needs to file Form ITR-5 for the income tax returns of firms and not the returns of the individual partners in a firm.

Many entrepreneurs fail to recognise that their business partners may expect special treatment when it comes to paying taxes. The truth is that partnership businesses pay taxes the same way as any other type of business. Still, because some people don't understand how this works, there's often tension between them and their partners, leading to some stressful situations.

A Comparison Chart for Partnerships

So far, we have introduced you to all the four different types of partnerships in business. Let’s quickly go through the concepts in the following chart:

 

General Partnership

Limited Partnership

Limited Liability Partnership

LLC Partnership

Who can create?

Anybody

Anybody

Specific professionals

Anybody

Owner Type

Partner

One limited partner and one general partner at the very least

Partner

Member

Number of owners

2 or more

2 or more

2 or more

2 or more

Protection of Personal Liability

No

Only limited partners are assured of protection

Yes

Yes

Guarantee of protection from the actions of other members

No

Only general partners are protected

Yes

No
 

Conclusion

Four different types of partnerships exist within the business, each with its strengths and weaknesses. The most important thing to remember is that, for any partnership to work, all parties involved must be able to trust each other. If there's no trust among the partners, then odds are your partnership will fail before it even gets off the ground. Make sure you take time getting to know your partners before making a big commitment like starting a business together; you'll save yourself a lot of headaches down the road if things go sour!
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FAQs

Q: What are the three main types of partnership business?

Ans:

  1. General partnerships,
  2. Limited partnerships, and
  3. Limited liability partnerships (LLPs).

Q: Who can enter into a partnership?

Ans:

Only those competent to contract are eligible to enter into a partnership. That is, they need to

  • reach the age of 18,
  • be of sound mind and
  • not be disqualified by law.

Q: What are the different types of partnership businesses?

Ans:

To name a few, the different types of partnership businesses are

  • Limited Partnership
  • General Partnership
  • Limited Liability Partnership
  • Particular Partnership
  • Partnership at Will

Q: What is a partnership in business?

Ans:

A partnership is a business entity made up of two or more people who join together to carry on a trade or business. Such partnership businesses exist in exchange for sharing ownership; partners share profits and losses.

Q: Is the partnership deed a public document?

Ans:

No, the partnership deed is not a public document like the company’s Memorandum of Association.

Q: Is an oral partnership deed valid?

Ans:

Yes, an oral partnership deed is valid. However, it is even better if the agreement is in written format.

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