What are some common types of partnerships?
The most common types of partnerships include a partnership, limited partnership, limited liability partnership, and limited liability company. The type of business that you operate determines issues such as the extent of personal liability that you have from the business and how the business is taxed. The legal structure of your business is extremely important to consider. With some types of partnerships, similar to corporations, state law enables you to create a legal entity under which you can transact business without the risk of exposing your personal assets to any liability that might arise out of your business affairs.
A partnership is the most simple form of partnership to set up. It requires at least two individuals willing to share the burdens and benefits of their business. A partnership provides the benefit of single taxation. This means that your percentage of the business profits is your income for the year. The only downside of a partnership is that the partners are not shielded from liability. This means that if your partnership is held responsible for someone’s injury, then you are responsible for their entire damages, even if it means paying out of you and your partner’s pockets. In order to avoid losing personal assets, most partnerships will own liability insurance.
A limited partnership (LP) offers the same tax benefits as a standard partnership with one exception. One or more of the partners are silent partners; this means that they will assist by giving the partnership seed money and collect profits, but will not run the business in any way. By remaining silent, these partners are shielded from liability.
Limited Liability Partnership
A limited liability partnership (LLP) still offers the partnership tax benefits, but also offers liability protection for its partners. Specifically, a limited liability partnership can only be sued for the total amount of assets in the business. For example, if a customer slipped on a pickle in your grocery store and is suing for their injuries, they cannot receive more than the total value of your grocery store. This partnership is a popular choice for law firms and medical practices to ensure that customers cannot sue for assets such as the practitioner’s home.
Limited Liability Company
A limited liability company (LLC) offers both the most benefits and the most protection for a business owner. The LLC provides for the same tax protection as a partnership, but also gives the liability protection of a corporation. Under corporate law, a corporation is only liable for the total start-up investment in the company. So, if your company is currently worth 20 million, but you had a start-up of 5 million, you cannot be sued for more than 5 million dollars. LLC’s are limited by state law to only certain types of practices. Some states, such as Arizona, have created an even greater hybrid called a Professional LLC, where professionals such as doctors and dentists can obtain the LLC protection, but with greater limitation than a regular business.