A partnership is a business shared by multiple owners. It’s not a legal business entity, and it doesn’t have to be registered with the state. Some types of partnerships are legal business entities registered with the state. These entities may provide limited liability protection to shield your personal assets.
- General Partnerships: It involves two or more owners carrying out a business purpose. General partners share equal rights and responsibilities in connection with the management of the business, and any individual partner can bind the entire group to a legal obligation. Each partner assumes full responsibility for all of the business’s debts and obligations. Although such personal liability is daunting, it comes with a tax advantage: partnership profits are not taxed to the business but pass through to the partners, who include the gains on their individual tax returns at a lower rate.
- Limited Partnerships: It allows each partner to restrict his or her personal liability to the amount of his or her business investment. Not every partner can benefit from this limitation — at least one participant must accept general partnership status, exposing himself or herself to full personal liability for the business’s debts and obligations. The general partner retains the right to control the business, while the limited partner(s) do not participate in management decisions. Both general and limited partners benefit from business profits.
- Limited Liability Partnerships (LLP): It retains the tax advantages of the general partnership form, but offer some personal liability protection to the participants. The Internal Revenue Service views these businesses as partnerships, however, and allows partners to use the pass-through technique. Existing partnerships that wish to take advantage of LLP status do not need to modify their existing partnership agreement, though they may choose to do so. To change status, a partnership simply files an application for registration as a limited liability partnership with the appropriate state agency. All states require disclosure of the partnership’s name and principal place of business. Some states also require, among other things, identification of the number of partners, a brief description of the business, a statement that the partnership will maintain insurance, and written acknowledgment that the limited liability status may expire.