A partnership is when two or more people work together to run a business.
Each partner helps with the business’s finances and operations, and in exchange, they are responsible for some or all of the company’s profits and losses.
There are four kinds of relationships in business:
- An LLC partnership, which is also called a multi-member LLC.
- LLP stands for “limited liability partnership.”
- General partnership (GP)
- Limited partnership (LP)
So why would you form an LLC company instead of a limited partnership? Let’s look at how these four business types work and the pros and cons of each.
related resources: a simple guide to limited partnerships & the most comprehensive guide to general partnerships
llc partnership with more than one person
A limited liability company (LLC) can have one or many owners, called partners. Multi-member LLCs or LLC partnerships are the terms for LLCs with multiple members.
Members of an LLC have a legal barrier between their personal assets and the business. This means that they can’t usually be sued for the acts or debts of the business. But they can be held responsible for the actions of another member, especially if they knew that member was careless or made management decisions that led to a case.
Keep in mind that the amount of protection from liability that LLCs offer can vary from one state to the next. Before you choose a business entity, make sure you know the rules and standards of your state.
Creating an LLC partnership has many perks, such as:
- Personal Liability Protection
Members are legally protected from the actions and bills of the business that affect their own assets.
- Tax Flexibility
LLCs can be taxed as either an S corporation or a C corporation instead of their usual tax classification.
- Corporations can join an LLC
A company can be a member of an LLC. Only people, not other companies, can own other types of partnerships.
- Anyone can Start an LLC
Anyone can Start an LLC but lawyers, accountants, and builders are the only ones who can start some partnerships. Almost any kind of business can form an LLC.
The fact that members can be held responsible for the acts of other members is one of the biggest problems with forming an LLC partnership.
most LLC partnerships comprise the following types of businesses
Companies whose owners want to protect themselves from risk while managing and running the business daily. Because almost any type of business can create an LLC partnership, they generally work well for everyone.
LLP stands for “limited liability partnership.”
A limited liability partnership (LLP) is a type of partnership where the owners aren’t personally responsible for the debts and obligations of the business or the acts of other partners.
This means that, in most cases, you can’t lose your personal assets if someone sues your business unless you did something wrong yourself. But partners can be held responsible for their mistakes or wrongdoings if they were careless or did something wrong.
Like an LLC partnership, an LLP changes from state to state in how it protects you from liability. Before making an LLP, you should always check your state’s rules.
LLPS have advantages like
- Liability Protection from the Acts of Other Members
Unlike in other types of partnerships, partners in an LLP could be protected from both the business’s debt and the negligence of other partners (depending on the state).
- Easy to Add or Remove Partners
With an LLP partnership agreement, you can easily add or remove partners and decide how much each partner gets paid from the business. (An LLC also helps in this way.)
- Flexible Management
Partners decide how much they want to be involved in the day-to-day operations and management of the business. This doesn’t change their personal responsibility.
Remember that each partner in an LLP is only responsible for their own actions. So even if they make business decisions with another partner, they will only be held responsible for their own acts.
some problems with making an llp are:
- Only Certain Professions Can Form an LLP.
Only lawyers, doctors, accountants, and builders can form an LLP in some states.
- No Flexibility with Taxes
LLPs can’t change how they’re treated, so they can only be taxed as partnerships.
- A Person Can only be the Owner of an LLP
Other types of partnerships can have a company as an owner but not LLPs.
- Recognition in Other States
Each state has its own rules about LLPs, and some states won’t accept LLPs that were formed in other states.
This can change how LLP owners are protected from responsibility if something goes wrong in another state. So, if your business is in more than one state, this may not be the best choice.
most LLPs comprise the following types of businesses
The types of jobs that can form LLPs change from state to state, but accountants, lawyers, architects, chiropractors, doctors, and dentists are some examples.
LP stands for “limited partnership.”
There are two kinds of partners in limited partnerships (LPs): general partners and limited partners.
- Limited Partners don’t run the business but generally give money and capital to start it up. People sometimes call them “silent partners.”
- General Partners help run the business and decide how to run it.
An LP must have at least one general partner and one limited partner.
- The General Partner is Personally Responsible for the Whole Business, including its debts and the actions of the other partners.
- The Limited Partner is Not Personally Responsible for the Company
This is because they don’t have any decision-making power.
The main benefit of an LP is that the law protects the limited partner, no matter how much money they put in or how much of the business they own. This could make a business more appealing to investors who have money to spend but don’t want to run the business themselves.
Other good things about LPs are:
- Power to Make Decisions
The general partner keeps the power to make decisions, while the limited partner’s money helps the business.
- Corporate Partners
A company can partner in a limited partnership, giving general partners more ways to spend.
One problem with a limited partnership is that a limited partner can lose their position if they get too involved in running the company. “Too involved” can mean doing things like signing legal contracts on behalf of the business, making choices about management, and doing business activities.
So, if the limited partner doesn’t like how the business is run, they don’t have much power to change it. It also means that the limited partner doesn’t have to be consulted about business choices, which may not be for everyone.
The problem with an LP for the general partner is that they are personally responsible for the business. No formal protection exists between the general partner’s personal assets and the business.
most LLPs comprise the following types of businesses
Companies with investors who don’t want to be involved in the day-to-day running or management of the business.
general partnership (GP)
Unlike other types of partnerships, general partnerships don’t need to be registered with the state and don’t even need a written agreement. If you and someone else work together on a business, you are automatically a general partnership.
There is no protection from personal responsibility in a general partnership.
That means that each partner is legally liable for the debts and acts of the business. If the business is sued or can’t pay its bills, the partners’ personal funds could be at risk. This also means that each partner is responsible for the actions of the other. (Be smart about who you do business with!)
what’s good about a general partnership is
- Easy to Set Up and Cheap to run
Since you don’t have to register with the state, you don’t have to pay the fees for starting or keeping a business.
- Taxes can be Changed:
With Form 8832 Entity Classification Election, a partnership can ask to be taxed as a company.
- Business Partners
General partnerships, like LLCs and LPs, can be owned by both people and businesses.
some problems with a general partnership are
- There’s no Safety in Personal Liability
If someone sues your business or if it still owes money, your personal assets are at risk.
- Partners are Each Responsible for the Acts of the Other
If your business partner gets sued, you could also get charged. If your partner is sued on their own but can’t pay the costs, the person who sued your partner may be able to get money from you.
most LLPs comprise the following types of businesses
companies that don’t want to register with the state and partners who are okay with sharing personal liability for their business.
when comparing the 4 types of partnerships: LLC vs. LLP vs. LP vs. GP.
We just talked a lot about how the four types of business partnerships are different.
Here is a quick picture that shows how these differences compare. Remember that your state may have different rules.
| LLC | LLP | LP | General partnership | |
| Number of owners | 1+ | 2+ | 2+ | 2+ |
| Owners type | Member | Partner | There’s a general
partner and a restricted partner. (You need at at least one of everything.) |
Partner |
| Personal protection from business liability | Yes | Yes | Yes, for select partners.
No For general partners. |
No |
| Liability protection against the acts of other partners | No | Yes | In general, partners
could be held responsible for each other’s acts. They are not responsible for anything. |
No |
| Tax division by
default |
For single
members or sole owners. Partnership for groups with more than one person. |
Partnership | (Only general partners have to pay taxes
on their own businesses. Limited partners are exempt.) |
Partnership |
| Flexibility in Tax | Yes | No | Yes | Yes |
| Structure of Management | Everyone can manage | All partners can manage | Only general partners
can run the business. |
All partners can manage. |
| Who can make it? | Anyone | Some states only allow specific jobs. | Anyone | Anyone |
| Needs to sign up
with the state |
Yes | Yes | Yes | No |
how do taxes work for business partnerships?
The IRS doesn’t see a multi-member LLC, LLP, or LP as a taxable entity, so it is taxed like a general partnership.
All four partnerships are pass-through businesses, which means the gains go to the tax returns of the partners. The business doesn’t pay taxes, but the partners do. A partnership deal spells out how much of the profit each partner gets.
At tax time, the partnership files:
- Form 1065: U.S. Return of Partnership Income, which records its total income, expenses, and profit or loss.
- Each partner should fill out Schedule K-1 to show their share of the business’s income or loss. This information is put on the personal tax report of the partner.
The self-employment tax and income tax are due on the income that a partner records on the K-1. The self-employment tax is 15.3 percent and usually applies to 92.35 percent of the partner’s net pay. The tax on income changes based on the tax rate of the partner.
A limited partner (LP) is the only type of partner who doesn’t have to pay self-employment tax. General partners of a limited partnership (LP) do have to pay self-employment tax because they make day-to-day decisions.
Since limited partners don’t participate in the business’s day-to-day running, their income isn’t called “earned income,” which is taxed as self-employment income.
By filing IRS Form 8832, LLCs, LPs, and general partnerships with more than one member can choose to be treated as corporations. By filling out IRS Form 2553, a multi-member LLC can also choose to be treated as an S corporation.
you may also like to read: business entities understanding tax implications & how does the irs get people to pay the taxes they owe
how do I get paid as a business partner?
As a partner, you can pay yourself by taking an owner’s draw, which is a portion of the business’s earnings.
The amount of your draw will depend on how much money your business makes and what your partnership agreement says about how much each partner is entitled to from the income.
You can’t pay yourself as a W-2 employee unless your partnership is treated as a corporation or S corporation.
Remember that partnerships are pass-through companies, meaning you still have to pay taxes on your share of the profit even if you don’t take any money from the business.
Let’s say that at the end of the year, your partnership has taxed income of $100,000. You and your business buddy each own half of the company. Your share of the money made is $50,000. You only take $25,000 out of the business as a profit during the year.
helpful resource: how to apply for a business license
Are you charged on the $25,000 you took out or the $50,000 that is your share of the profit?
You have to pay taxes on $50,000 because, as a pass-through company, you pay taxes on the profit given to you.
Now that you know the pros and cons of each type of partnership, you’re one step closer to your dream of starting a business with Countick, your business partner, by your side.
