Different Types of Business Partnerships and Which Is Best?

What Are Business Partnerships?

When a business entity is operated by two or more parties, but is unincorporated, it is called a partnership.

A partnership may take on various forms such as a general partnership, a limited partnership, and a limited liability partnership.

Just as with sole proprietorships and incorporated corporations, the partnership, and its name must be registered with the province.

Compared to other forms of business entities, a partnership is more complex and expensive to establish and operate than a sole proprietorship, and less complex and expensive to operate as a corporation.

There are several forms of partnerships, which are described below.

What Are the Different Types of Partnerships?

1) General Partnership

In a general partnership, all the partners of the partnership are responsible for all aspects of the business, including its debts and other obligations. You combine your resources with the other partners to generate revenue and make a profit.

In short, each partner contributes something, such as money, property, or their personal skills and profits or losses are divided among the partners, based on their given share.

This type of partnership has a simpler tax structure where partners report income and expenses on their personal tax returns. However, this also means that partners are taxed at a personal rate, which is typically higher than a corporate tax rate.

The biggest disadvantage of a general partnership is that the partners are personally responsible for all the business’ financial and legal liabilities and there is no limit on liability. Further, partners can legally bind one another without prior approval.

Another notable disadvantage is that fewer options are available to general partners compared to a corporation when it comes to raising capital. Therefore, the partnership will need to rely on the personal assets and creditworthiness of the partners.

We recommend having a partnership agreement in place to define and crystallize the rights and obligations of the partners.

2) Limited Partnership

A limited partnership is formed by two or more individuals or corporations. It is distinct from a general partnership as it has a legal status separate from its partners.

Similar to a general partnership, each partner contributes money, property, or skills. However, it can consist of both general and limited partners, which is unlike a general partnership.

Limited partners are typically investors who do not oversee daily management operations and much of the operation of the partnership is left to the general partner.

The “limited” refers to their limited liability. Thus, their financial and legal liability is limited to the amount invested in the business. In contrast, the general partner does manage the day-to-day operations, as stated above, and has unlimited liability.

The business’ profits or losses are divided among the partners, with general partners typically earning a larger share.

While partners report income and expenses on their own tax returns, limited partner ownership interests can be transferred, like shares in a corporation. As a result, it can be easier to raise capital than it might be with other business structures.

It also requires a detailed partnership agreement to avoid potential conflict between shareholders and directors.

3) Limited Liability Partnership

Much like the other forms of partnership discussed, a limited liability partnership is also formed by two or more individuals or corporations. As with the other forms of partnership, each partner contributes money, property, or skills. How the profits (or losses) are divided and distributed among the partnership depends on each partner’s share in the partnership.

Limited liability partnerships also have legal status separate from the partners and can be maintained for many years. It is a business structure commonly used by regulated professionals such as lawyers, accountants, doctors, architects, and engineers.

The main advantages of a limited liability partnership over a general partnership is that the liability of limited partners is capped. In addition, limited partner ownership interests can be transferred to another potential partner. Lastly, partners have the opportunity to claim losses against other sources of income given that they report income on their personal returns. Hence, it can be easier to raise capital.

Despite the benefits stated above, the main setback of a limited liability partnership is that it is more time-consuming to establish and often more expensive, as such a partnership requires a comprehensive partnership agreement. Additionally, a limited liability partnership may also be subject to further regulation by a professional’s regulating body.

How To Set Up A Partnership

Setting up a business is no simple task. We suggest speaking to your accountant as well as consulting with a lawyer.

Our Corporate team knows all the ins and outs of forming and operating a business and would love to help you get started!

Contact us today! You can reach us by email at hello@papercliplaw.com or call us at 604-973-0188.

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