A majority of all partnerships can be classified as one of three distinct structural types. The first, a general partnership (GP) is the most common, and considered one of the most informal business structures. The other two types, limited partnerships (LPs) and limited liability partnerships (LLPs), are slightly less common but may be perfect choices for certain companies.
For many first time business owners, even those with some business experience, choosing the ideal type of partnership for their new organization can be a difficult task. Read ahead for the most important aspects of each of the most common partnership types, basic information on how each structure is taxed, and the personal liability protections that the structure offers.
Three reasons to form a GP
You want to:
Save money on administrative tasks
Outside of the necessary local or state business licenses and permits, general partnerships are free from any other government-imposed regulations. This means less profits go to administrative overhead. Other more formal business structures must pay certain fees and taxes, which can begin to add up to substantial expenses over time.
Spend less time on formalities
Most businesses that are incorporated are forced by law to hold certain annual ownership meetings, keep accounting separate for their personal and businesses needs, and formally keep document of some or all of their day-to-day operations. General partnerships are free from nearly all of these requirements, which save their owners a great deal of time and/or labor.
Form your business simply
There is no formal filing process required to start a general partnership. As soon as you begin to conduct business, your partnership is considered “formed”.
Three reasons to form an LP
You’d like to:
Include “silent partners”
Unlike other more formal business structures, LPs can have two distinct types of owners, general partners and limited partners (sometimes referred to as “silent partners”). Only general partners are required to be a part of the management of the business. This makes limited partnerships ideal for individuals simply looking to make a financial investment as a silent partner.
Protect investors from liability
Only general partners can be legally or financially accountable for any of a limited partnership’s actions. This in effect creates a limited liability situation for any limited partners (such as investors), making LPs attractive to investing “silent partners”.
Take on a time-limited project
Because LPs allow for “silent partners” involved purely for investment purposes, an LP is likely the ideal structure when forming a business that revolves around one short-lived project (e.g. film production, estate-planning, or event management).
Two reasons to form an LLP
You need to:
Create a partnership of professionals
Legally, most types of businesses that offer professional services are forced to form as LLPs (or a select few other business types). Some common examples include law practices, medical providers, accounting firms, and architectural companies.
Eliminate your personal liability for your partner’s missteps
Due to the sensitive nature and implications of the services these professionals offer, liability is an important factor that is addressed within the structure of an LLP. While each partner of an LLP will be required to carry their own form of professional malpractice insurance, they cannot be held financially or legally accountable for the mistakes or negligence of the other partners.
All three types of partnerships that we have discussed are taxed identically. No partnership type is required to pay taxes at the business level. Instead, each owner is required to file a separate Form 1065 and schedule K with the IRS, which helps the government determine the personal federal income tax liability of each partner.
Liability protection for partnerships
While personal liability is an important issue that needs to be addressed by any business owner, not every type of partnership provides limited liability. GPs are not granted any form of limited liability protection at all—the owner’s personal assets can be collected in the event of a the business becoming insolvent. This makes forming a GP a relatively high risk to owners, when compared to other business types. LPs and LLPs do offer limited liability, but with a strict set of restrictions and requirements, which we have previously noted.
Swyft can help!
There are a lot of variables that will influence your decision on which partnership structure is ideal for your business. The experienced business professionals at Swyft can walk you through your options.Contact us today!