When we start business in partnership one thing should be clear in our mind that what is business partnership? what are partnership types?
Partnership types are a common option for people who want to go into business with other people. The term “partnership” has changed over the years, as business people have added new features to the old form of business. The most used types of partnerships are listed here, with their characteristics, to help you decide what type you want to use.
What is Business partnership?
A partnership is a company with several individuals, each of whom owns part of the business. Partners can be active participants in the management of the company or they can be passive investors. The relationship between partners, the percentage and type of property, and the duties of partners are clarified in the partnership agreement.
In any partnership, each partner must “buy” or invest in the partnership. Usually, the share of each partner in the profits and losses of the partnership is based on its percentage of participation.
Partnerships are formed by states and are subject to state laws, so certain types of partnerships may not be available in some states. Check with the commercial division of your state (usually part of the state secretariat) for information on the partnership.
Two types of partners
The best way to start talking about a partnership business is to talk about the two types of partners. sponsors and sponsors. Both invest in the business, but they differ in their activity within the business.
- The sponsored partners are active in the company, doing the work of the company (being CPA, for example). But also participating in management and decision-making.
- Sponsors are passive. They have invested in the company but do not participate in the daily management of the company.
There is in fact a third type of partner, the managing partner, a general partner who performs additional functions in the management of the commercial affairs of the partnership.
Taking into account responsibility in partnerships and and what are partnership types
Depending on the type and amount of the stake in the company.
The partners can be held responsible for the debts of the company and the proceedings against themselves personally.You can see that some trade names contain the word “limited”, such as a limited partnership, a limited liability company or a limited liability company (LLC). The use of this word means that some owners have a personally limited responsibility against prosecution and debts.
A limited liability partner is only responsible for its investment in the partnership. For example, if a partnership declares bankruptcy, the sponsors only have to pay the amount of their investment.
The sponsored partners are similar to the sole owners in terms of liability. In both cases, the owners are not separated from the business in terms of liability for the company’s debts and for their actions. That is to say, they have full responsibility.
This is why new types of partnership are often set up in the form of limited partnerships. To form partnerships with limited partners, in order to limit the responsibility of a partner for the actions of other partners.
Limited liability companies (SARL) with more than one member (owner) are taxed as partnerships and operate in the same way. The advantage of an LLC over a general partnership lies in the limited liability of all owners.
A general partnership is a partnership made up entirely of sponsorships. Each sponsor must actively participate in the management of the company and any partner can sign a contract on behalf of the partnership. Associates must accept important decisions, acting as the company’s board of directors.
Advantage: Each partner can act independently, and each can invest in different types of capital. This type of partnership also has low start-up costs and few formalities.
Disadvantage: A general partnership operates as a sole proprietorship, without separation between the partners and the company. Since the sponsors actively participate, their responsibility is not limited, as described above. If a partner is prosecuted, all partners are held responsible. A partner’s personal property may be seized by a court or a creditor.
A limited partnership includes both sponsored partners and at least one sponsoring partner. In many cases, there is a sponsor who manages the business and a number of sponsors. A sponsor does not participate in the daily management of the company and his responsibility is limited to his investment in the company.
Sponsors are only investors who do not want to participate in the partnership other than to bring capital and receive a share of the profits. You may want to use the partnership option to form a partnership, for example, with relatives or friends who simply want to invest.
Since sponsors do not participate in management, they are considered as passive investors. This means that they can only take losses up to the amount of their income for the year.
Limited liability companies
A limited liability company (LLP) is different from a limited partnership or a general partnership but is closer to a limited liability company (LLC). In the LLP, all partners have limited responsibility. LLPs are often formed by groups of professionals who want to pool their resources and save money by sharing space.
Advantage: Unlike the limited partnership, the sponsors of an LLP have limited liability.
Since the responsibility of all partners is limited, some companies or individuals may be wary of doing business with the partnership.
SARL or partnership ?
In recent years, the limited liability company has become more common than the general partnership and the limited partnership, because it has a more limited responsibility for owners (as the name suggests).
But there are still cases in professional practices (law, accounting, architecture, for example). In which certain partners want to be limited in the scope of functions and they just want to invest, having the protection of responsibility to be in a limited partnership.
While a multi-member LLC (owner) is taxed as a partnership, there are differences in liability and other property provisions. The main difference is that all owners of an LLC (called “members”) have limited liability, while in a partnership, the partners who run the business have a general responsibility for everything that happens.
Joint ventures as partnerships
The Small Business Administration lists a joint venture as a type of partnership. A joint venture is generally a partnership between different companies formed for a specific purpose or for a specified period of time.
Joint ventures qualified as partnerships
An eligible joint venture is a type of partnership in which two spouses who jointly own a business
They can choose to produce their income taxes separately to avoid to have to produce a complicated tax return. In this case, each spouse produces an annex C for their share of the company’s net income. If the couple deposits jointly, the two appendices C are included in the joint income statement.
Partnerships and tax issues
When considering a type of partnership, you should also consider how a partnership is taxed. The partnership as a whole files an information declaration only on form 1065. Individual partners receive an annex K- 1 indicating the share of the profits or losses of the partnership for the year.
Annex K- 1 is included in the personal income statement of each partner. Each partner pays income tax on their share of the net income of the partnership.
If you want to start a partnership, this article guides you step by step throughout the process. You can be a good entrepreneur. Now you know about partnership types.