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 am a seasoned expert in business structures and partnerships, with a deep understanding of the legal and operational nuances that guide entrepreneurs in choosing the most suitable business entities. Over the years, I have advised numerous business owners on the intricacies of general partnerships, limited partnerships, limited liability partnerships, and their tax implications.
In the realm of business structures, general partnerships (GPs) stand out for their simplicity and ease of creation. One compelling reason to choose a general partnership is the minimal bureaucratic hurdles involved. Unlike other forms of business entities, GPs do not require state filings, reducing both time and cost. The absence of ongoing state fees and franchise taxes further contributes to their appeal, making them an economical choice for entrepreneurs looking to establish a business quickly and inexpensively.
Limited partnerships (LPs), on the other hand, offer a unique balance of liability protection and investment flexibility. General partners bear unlimited liability, while limited partners enjoy protection against personal asset use for business debts. LPs are particularly favored for short-term projects and ventures, such as film productions, where a specific business structure is needed for a limited duration.
Limited liability partnerships (LLPs) cater specifically to professional service businesses, such as accountants, attorneys, architects, dentists, and doctors. LLPs provide personal asset protection for partners, shielding their assets from business debts and liabilities. However, it's crucial to note that LLPs do not absolve partners from personal liability for their own malpractice, ensuring accountability for professional actions.
In terms of taxation, general partnerships, limited partnerships, and limited liability partnerships share a common tax structure. They are all pass-through entities, with profits and losses flowing through to the individual partners. The tax filing process involves Form 1065 with the IRS and a Schedule K for each owner, detailing their share of the partnership's financials.
While general partnerships have the advantage of simplicity and low operational costs, they come with a significant drawback—no liability protection. In a general partnership, personal assets are at risk, and partners share responsibility for each other's actions. This heightened risk makes general partnerships a trade-off between ease of establishment and increased exposure to potential liabilities.
In conclusion, the choice of partnership type depends on various factors, including the nature of the business, liability considerations, and tax implications. Entrepreneurs must carefully evaluate their priorities and objectives to select the partnership structure that aligns with their business goals and risk tolerance.
