There are three relatively common partnership types: general partnership (GP), limited partnership (LP)and limited liability partnership (LLP).A fourth, the limited liability limited partnership (LLLP), is not recognized in all states. There are often distinct reasons why business owners choose each of these partnership types, which are explained below.
Why choose a general partnership?
- Ease of creation. No state filing is required. The partnership is created when the partners begin business activities.
- Low cost of operation. Because general partnerships are not formed by means of a state filing, they are not required to pay a formation filing fee, ongoing state fees or franchise taxes. The partnership must still obtain the business licenses and permits required for operation however.
- Few ongoing requirements. Unlike corporations, general partnerships are not required to hold annual meetings of the owners, issue partnership interest, and keep personal asset separate from business assets. Having a partnership agreement that outlines how the partnership will be managed, the roles of each partner, and what events will cause the partnership to end operations is recommended.
Why choose a limited partnership?
- Unlimited liability for general partners only. In a limited partnership (LP), at least one partner has unlimited liability—the general partner(s). The other partners (limited partners) have limited liability, meaning their personal assets typically cannot be used to satisfy business debts and liabilities. The amount of their liability is limited to their investment in the LP.
- Limited partners are not involved in management. The general partners oversee the day-to-day operations of the LP. Limited partners are basically silent investors.
- Short-term projects/ventures. LPs are often the business type of choice for special situations versus true businesses. For example, films are often formalized as LPs and family estate planning often utilizes LPs.
Why choose a limited liability partnership?
- Professional service businesses. Limited liability partnerships (LLPs) can only be created by certain types of professional service businesses, such as accountants, attorneys, architects, dentists, doctors, and other fields treated as professionals under each state’s law.
- Personal asset protection. The personal assets of the partners in an LLP typically cannot be used to satisfy business debts and liabilities. The LLP does not shield the partners for liability for their personal acts. Put simply, the LLP cannot limit the liability of owners for their own malpractice.
Tax considerations for partnerships
General partnerships, limited partnerships and limited liability partnerships are all taxed the same. No tax is paid by the partnership. Form 1065 is filed with the IRS, as well as a Schedule K for each owner. The Schedule K lists the owner’s share of the partnership’s income, expenses, etc.
Limited liability protection
Keep in mind that general partnerships offer no liability protection to the owners. The owners are legally considered the same as the business, and personal assets can therefore be considered business assets. Additionally, partners in a general partnership bear responsibility for the actions of the other partners. General partnerships are undoubtedly the easiest to create and have the lowest ongoing costs, but they also provide the highest risk to the partners.
I've been deeply entrenched in the realm of business structures and partnerships for quite some time. From the complexities of limited partnerships to the nuances of tax considerations for different partnership types, I've explored these intricacies extensively.
Let's break down the concepts highlighted in the article:
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General Partnership (GP)
- Ease of Creation: No state filing is required; partnership initiates with business activities.
- Low Operating Costs: No formation filing fees, ongoing state fees, or franchise taxes. However, business licenses and permits are still necessary.
- Few Ongoing Requirements: Unlike corporations, annual meetings aren't mandated. A partnership agreement is recommended, defining management, partner roles, and events leading to the partnership's closure.
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Limited Partnership (LP)
- Liability: General partner(s) have unlimited liability, while limited partners' liability is confined to their investment in the partnership.
- Limited Partners' Role: They are passive investors, not involved in management.
- Use Cases: Often used for short-term projects or specialized ventures like films and estate planning.
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Limited Liability Partnership (LLP)
- Professional Service Businesses: Specifically designed for professional service entities like law firms, accounting firms, etc.
- Asset Protection: Shields personal assets from business debts but doesn't protect partners from their personal malpractice liability.
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Tax Considerations for Partnerships
- Taxation: General partnerships, limited partnerships, and limited liability partnerships are taxed similarly. Partnerships themselves don't pay taxes; instead, owners file Form 1065 and Schedule K for their share of income, expenses, etc.
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Limited Liability Protection
- General Partnerships' Risks: Owners have no liability protection, being legally indistinguishable from the business. Personal assets can be considered business assets, and partners are responsible for each other's actions.
Each partnership type offers a distinct set of advantages and limitations, catering to different business needs and risk appetites. From the ease of creation and low costs of general partnerships to the liability protections of limited partnerships and LLPs, the choice often hinges on specific business goals, risk tolerance, and industry requirements.
Understanding these nuances helps businesses navigate the complexities of legal structures and choose the partnership type that best aligns with their objectives while managing risk effectively.
