Business Entities Part 3: Partnership
There are three primary types of partnerships; a General Partnership (GP), a Limited Liability Partnership (LLP) and a Limited Partnership (LP)
Whenever you hear someone talking about a partnership and not specifying whether it is a GP, LLP or LP, your default position should be that they are referring to a GP.
General Partnership (GP)
A GP is formed any time that two or more co-owners engage in a business for profit. This is the legal terminology for a GP. Simply, a GP exists when two or more people own a business together. This means that anytime that a business with two or more owners is not designated as another type of business entity (such as LLC or corporation) the business will be considered a GP.
Just like a sole proprietorship the owners of a GP are personally liable for all liabilities they incur while operating the business. Further, the partners are personally liable for the liabilities incurred by other partners of the GP, as long as those liabilities were incurred in the regular course of business.
Unless otherwise stated in the partnership agreement, selling ownership interest in the business is not allowed without the consent of all of the owners. However, unlike a sole proprietorship you do have the possibility of selling ownership interest, either through the consent of all of the owners or through a provision in the partnership agreement stating such.
Limited Liability Partnerships (LLP)
A LLP is formed by registering the business as an LLP. However, in California only accountants, attorneys, architects, engineers and land surveyors may form an LLP.
A LLP is a form of partnership that avoids personal liability for business liabilities that are not personally incurred by that owner. Simply, an owner in a LLP is only liable for their personal liabilities, not for the liabilities caused by other owners of the LLP.
Generally, capital investments are the same as a GP. However, the same restrictions on the type of owners in a LLP that apply at formation, apply to becoming an owner of an already existing LLP. For example, only an attorney may own an interest in a legal LLP. Therefore, you could not sell ownership interest in an legal LLP to a non-lawyer.
Limited Partnership (LP)
Just like a LLP, a LP is formed by registering the business as a LP. A LP has at least one general partner and at least one limited partner, but may have more than one of each.
Limited partners are not personally liable for any liabilities of the business, while general partners are personally liable. However, the general partners of a LP can be a LLC or corporation (two business entities that I will discuss in coming posts). Therefore, you could avoid liability even for the general partner.
A LP is specifically designed to encourage investment in the company, this is why limited partners are not personally liable.
Just like a sole proprietorship, all partnerships do not face double taxation. As such, the profits earned from any form of partnership are only taxed once.
Overall, the different forms of partnership provide the same tax benefits as a sole proprietorship. A LLP and LP avoid a great deal of liability, while a GP, just like a sole proprietorship does not avoid any liability. Lastly, although this may be obvious, the moment that you have two or more owners in a business, the business is no longer capable of being a sole proprietorship and immediately becomes a GP, unless registered otherwise.
Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.