What are Some Common Types of Partnerships?

The most common forms of partnership include a partnership, limited partnership, limited liability partnership, and limited liability company. The type of business that you operate determines issues such as the extent of personal liability that you have from the business and how the business is taxed. The legal structure of your business is extremely important to consider. With some types of partnerships, similar to corporations, state law enables you to create a legal entity under which you can transact business without the risk of exposing your personal assets to any liability that may arise out of your business affairs.

What is a partnership?

A partnership is the simplest type of partnership to set up. It requires at least two business partners willing to share the burdens and benefits of their business. A business partnership provides the benefit of single taxation. This means that your percentage of the business’s profit is your income for the year. The only downside of a partnership agreement is that the partners are not shielded from liability. This means that if your partnership is held responsible for someone’s injury, then you are responsible for their entire damages, even if it means paying out of you and your partner’s pockets. To avoid losing personal assets, most partnerships will own personal liability insurance.

What is a limited partnership?

A limited partnership (LP) is a type of partnership that offers the same tax benefits as a standard partnership with one exception. One or more of the partners are silent partners; this means that they will assist by giving the partnership seed money and collect profits, but will not have an active role running the business in any way. However, they will still possess a share of ownership. By remaining silent, these types of partners have personal liability protection and financial obligation.

What is a limited liability partnership?

A limited liability partnership (LLP) still offers the partnership tax benefits, but also offers liability protection for its partners. Specifically, a limited liability partnership can only be sued for the total amount of assets in the business. For example, if a customer slipped on a pickle in your grocery store and is suing for their injuries, they cannot receive more than the total value of your grocery store. This form of partnership is a popular choice for law firms and medical practices to ensure that customers cannot sue for assets such as the practitioner’s home.

What is a limited liability company?

A limited liability company (LLC) offers both the most benefits and the most protection for a business owner. The LLC provides for the same tax protections as a partnership but also gives the liability protection of a corporation. Under corporate law, a corporation is only liable for the total start-up investment in the company. So, if your company is currently worth $20 million, but you had a start-up of five million dollars, you cannot be sued for more than five million dollars.

LLC’s are limited by state law to only certain types of practices. Some states, such as Arizona, have created an even greater hybrid called a Professional LLC, where professionals such as doctors and dentists can obtain the LLC protection, but with greater limitations than a regular business.

Case Studies: Common Types of Partnerships

Case Study 1: Standard Partnership

John and Mark decided to start a small accounting firm together. They formed a standard partnership, which is the simplest type of partnership to set up. Both partners shared the burdens and benefits of the business equally. They enjoyed the benefit of single taxation, where their share of the firm’s profit was treated as their individual income for the year.

However, one day, a client slipped and fell in their office, resulting in a lawsuit against the partnership. Since the partnership doesn’t offer liability protection, both John and Mark were personally responsible for the damages, making them vulnerable to potential financial loss. To safeguard their personal assets, they decided to obtain personal liability insurance.

Case Study 2: Limited Partnership

In a real estate development project, Jane and her two partners formed a limited partnership (LP). Jane was the active partner, managing the daily operations, while the other two partners were silent investors providing seed money. The LP allowed the silent partners to share in the profits without taking an active role in running the business.

More importantly, the silent partners enjoyed personal liability protection, meaning they were not personally liable for any debts or lawsuits against the partnership. This arrangement gave them financial security while still allowing them to benefit from the business’s success.

Case Study 3: Limited Liability Partnership

Dr. Smith and Dr. Johnson, two medical professionals, decided to open a medical practice together. They opted for a limited liability partnership (LLP) to combine the benefits of partnership taxation with liability protection. One day, a patient filed a malpractice lawsuit against the medical practice.

Thanks to the LLP structure, the doctors were only liable for the total assets of the business, meaning their personal assets, such as their homes, were shielded from the lawsuit. This protection allowed them to focus on providing quality medical care without fearing excessive personal liability.

Case Study 4: Limited Liability Company

Sarah and David wanted to start an online retail business. They chose to form a limited liability company (LLC) to benefit from the combined tax advantages of a partnership and the liability protection of a corporation. The LLC structure allowed them to be taxed as a partnership while limiting their personal liability for any business debts or lawsuits.

As the business grew, the LLC’s protection became crucial as they faced a customer lawsuit. Thanks to the LLC, Sarah and David’s personal assets were safeguarded, and their liability was limited to the total investment in the company.