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A partnership is a form of business body in which partners split with each other the profits or losses of the business undertaking in which they all have invested. There are two types of Partnerships - General Partnership and Limited Partnership.
General Partnership
A General Partnership, often simply called a partnership, is the most basic type of partnership. It is formed when two or more people agree to start and carry on a business together. It can be either a written or oral agreement that the two or more people intend to work together with a specific business in mind. Unlike incorporating your business, there are no local or state filings required when you are creating this type of partnership. This makes it easier for two or more people to start a business when they are unsure of where they are going with it.
The difference with incorporating is that this type of partnership has unlimited liability of each of the partners. This means that each partner is personally liable for all of the debts of the partnership including any debts that are incurred on behalf of the other partner when it comes to the partnership itself. For example if you have a partner who occurs debts with a specific vendor then you will equally be held responsible even if you had no knowledge of what was taking place. Any one partner is able to bind the partnership by entering into a contract whether or not the other partner agrees to that contract. This cannot be done in a corporation where all members release their liability to the corporation itself.
Due to the above mentioned reasons a general partnership can be relatively dangerous to enter in to when you are considering conducting any type of business. Not only are you liable for their contracts that they may enter in to, but you are also held responsible for any negligence on their part. This can be personally devastating when you are talking about a general partnership in certain fields such as doctors or lawyers. If one partner is sued for malpractice, then the other partner is held liable and may lose all of their assets and capital gain that they may have accrued through their business and personal life.
In addition to the personal liability, each partner is liable for the entire amount of any partnership obligation. For a partner that is only 10% invested into the partnership they are still responsible for 100$ of the partnership obligations which can cause problems if the partner who is 90% invested makes a wrong move or occurs debts that they cannot pay. If that partner is unable to pay their share, then you are then responsible for paying all of it.
At some point in time there will be disagreements in the way you run your general partnership which can be devastating to the business itself but that does not mean it can’t be overcome. If you are aware that each partner has a strength that the other partner might not have you could simply agree to disagree or divvy up the operational responsibilities to give each partner their own daily activities to take care of. The fact that you each bring something to the table and can use your knowledge and resources to work together is the main reason why people start general partnerships in the first place.
Limited Partnership
A limited partnership is different in many ways to a general partnership, especially with the role and responsibilities that are taken on by you as a limited partner. By being a limited partner you can provide capital and help arrange the financing even if you are not taking an active role in running the actual business. However, you can still receive a share of the profits for your involvement. The person who runs the business is the general partner and for the most part you will not be actively involved in the day to day operations.
Each state has specific statutes that regulate the responsibilities and obligations of each of the partners in this type of business arrangement. In a limited partnership you are required to file with the Secretary of State and you must also file various reports during the time of your limited partnership.
What really differentiates a limited partnership from a general partnership is the liability in which you are responsible for. General partners will be held liable for everything whereas the limited partners will be exempt from most liabilities. This is the general reason that most people do not want to get involved with a general partnership to begin with. The liability issue is very overwhelming to most people, but this gives you a way, as a limited partner, to be able to be part of the business without losing your financial security in the process. The general partner can be a corporation in and of itself while mitigating liability issues to you, but at the same time you can still have a vote in the major decisions that affect your particular part of the partnership.
For a partner that has the money to invest in a company but not the expertise or the ability to be hands on, this may be an excellent way to invest in a business without having to run it daily. It is almost more attractive to some people to take the risk of their investment without running the risk of the liability. As far as taxes are concerned, a limited partnership is much like a general partnership in that it is a pass through operation with the profits passing through to the partners who then include it on their own personal tax returns.
Many businesses that deal with real estate are done through a limited partnership. This means that the limited partner invests the money for the general partner to buy a home or commercial property and then the general partner does all the work in fixing it up, renting it, and possible reselling it. It is much easier to attract people to investing in your business then it is to become a general partner when much of the responsibility lies on them if you are unable to hold up your end of the business. They can still have a say in what takes place in your business but they are able to defer to you when it comes to running the actual business. Limited partners also have the ability to leave a business or be replaced if necessary which makes that a nice advantage for the general partner if needed.
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