Are you confused by the different types of business partnerships? There are three main types you need to know about that are the most common in business.
A general partnership this is a private business that’s owned by at least two partners but there can be more involved in the business. This is a very common way to do business and a general partnership is also unincorporated. The business usually has a contract which is called the partnership agreement where all parties agree to how the business is to be run and who has the rights to make decisions about that company. Partners in the company have unlimited liability such as debts, taxes, and so on. This means that partners are responsible for paying off debts. Partners in the company can get “general partnership liability insurance” for protection from each other. This type of insurance is recommended for anyone getting involved with a general partnership due to the risks.
Easy to set up and start
- Cost-effective as partners may have skills in certain areas which benefits the business.
- Partners cÐ°n provide support for each other
Partners are liable for each other’s actions which can ruin the company
- You must share profits with each partner making it difficult trying to decide how to split them up
- They can have a limited life span
Limited Liability Company or LLC
One of the recommended types of business partnerships is called the LLC or Limited Liability Company. This business combines traits of the corporation and the sole proprietorship. In an LLC the owners have the pass-through taxation feature which is found in a sole proprietorship or a partnership. At the same time the liability of the owners is limited like in a corporation. Here are some of the advantages of this type of partnership:
- The members of the LLC have liability protection. In the event of losses or debts they aren’t liable for the losses suffered by the company.
- They have freedom to distribute profits which doesn’t have to be equal amongst the members of the company.
- They don’t have legal requirements to record minutes or have formal meetings.
- They have benefits that are similar to a corporation.
- It doesn’t have to be taxed due to pass-through taxation unless it wants to be treated like a regular corporation.
Disadvantages of LLC
Usually dissolved if a partner dies or there’s a bankruptcy
- Company can’t go public as there’s no shareholdings or shares
- Sometimes difficult to raise capital for the company
- LLC is unfamiliar to many
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Among the types of business partnerships you’ll find the S corporation. This is a type of corporation for tax purposes that’s treated with a pass-through. They make an election with the IRS to be considered an S corporation.
The S corporation is created through Articles of Incorporation which is usually done by the Secretary of State. There is stock issued and it’s treated as a regular corporation. The owners are then called shareholders and have protection from liability like a C corporation. Assets can’t be seized to cover liability losses in this type of partnership.
- It’s easy to transfer ownership or stop the business
- The assets of the company are protected
- It gets the pass-through taxation
- Can establish new business with more credibility in the marketplace
Ongoing expenses due to filling for Articles of Incorporation. Fees are often imposed which are ongoing for the company
- IRS scrutiny – The IRS may look at payments given to shareholders.
- There can be less flexibility – It’s difficult to allocate income or loss to specific shareholders