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What are the Different Types of Business Partnerships?

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  • Written By: K. Kinsella
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 03 November 2016
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There are three main types of business partnerships: general partnerships, limited partnerships and limited liability partnerships (LLP). General partnerships are comprised of individuals who have equal control of an entity whereas in a limited partnership, some partners have more control of the company than others. An LLP is an agreement in which no partner is liable for the financial or legal obligations of the other partners. All types of business partnerships involve two or more people undertaking an enterprise with the intention of generating profits.

General partnerships are the most common of the different types of business partnerships because in many states and countries, general partnerships can be formed based on a verbal agreement and no written documents are required to validate the creation of the entity. Business profits received by a general partnership are divided equally among all of the partners. The business entity does not have a tax burden, because each partner pays income tax on their share of the earnings. Laws in many areas allow members to join or leave general partnerships without the entity having to be dissolved and re-formed.

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Limited partnerships are a type of business usually controlled by a senior partner who runs the company and makes key business decisions. The other partners operate under the business name and receive a share of profits, but do not have equal ownership rights with the senior partner. Lawyers and real estate brokers often establish limited partnerships when their customer base expands to a point that they can no longer handle it by themselves. When junior partners have become established in the local area, they often leave the company and start their own firm.

LLPs are common in the medical field because no partner is liable for the other partner's actions. When doctors face malpractice lawsuits, only their part of the business is at risk from the plaintiff's compensation demands. LLPs, unlike other types of business partnerships, are normally required to pay taxes. The partners only receive their share of the profits after the entity has been taxed. Each partner then pays income tax on their own share of the company's earnings.

When partnerships apply for business loans or establish bank accounts, the partners must sign as guarantors. Despite the fact that in many countries general partnerships are not legally required to be established in writing, banks and lenders require written documentation that defines the entity before its members can establish accounts. Some partnerships establish retirement accounts for partners, but for tax reasons these accounts are classified as profit share plans.

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