Different Types of Partnership Business

What is a partnership business?

A partnership business is a form of business structure where two or more individuals come together to manage and operate a business with the aim of sharing profits. Each partner contributes capital, skills, or labour to the business and shares the profits and losses according to a pre-agreed ratio or equally, depending on the partnership agreement. Partnerships are a common choice for small and medium-sized enterprises (SMEs) in India due to their simplicity and ease of formation. The partners are collectively responsible for the debts and obligations of the business, and their liability is typically unlimited unless the partnership is structured differently, such as a limited liability partnership (LLP). A partnership agreement is crucial in defining the roles, responsibilities, and profit-sharing ratios among partners, ensuring smooth operation and conflict resolution within the business.

What are the types of partnership firms?

1. General partnerships

A general partnership is when two or more people run a business together. In this type of business, all partners share equal rights in managing the business and are equally responsible for any debts. Any one partner can make decisions that legally bind the whole partnership.

Each partner is fully responsible for all the business's debts and obligations, a concept known as unlimited liability. This means a partner's personal assets can be used to pay off business debts. While this might seem risky, it has a tax benefit.

The profits of a partnership are not taxed as a business, but instead are passed on to the partners. These profits are then taxed at a lower rate on each partner's personal tax return. This avoids the issue of double taxation.

Creating this type of business structure is simple. You do not need to file any incorporation documents with the government. Instead, choose a business name, get a business licence if required, and open a business bank account.

2. Limited partnerships

A limited partnership has two types of partners: general partners who run the business and face unlimited liability, and limited partners who invest money but have limited involvement in decision-making.

This setup allows some partners to limit their responsibility based on how much they invest. However, at least one partner must take on the role of a general partner with full personal liability for the business's debts. The general partner manages the business, while limited partners do not make management decisions. Both types of partners share in the profits.

Limited partnerships are seen as separate entities for tax purposes, so business taxes pass through to the partners, avoiding double taxation. This form is common for professional services and startups.

3. Limited liability partnerships (LLP)

Limited liability partnerships (LLPs) are similar to limited partnerships but offer some liability protection to all partners. LLPs maintain the tax benefits of general partnerships but add some personal liability protection. In an LLP, partners are protected from business debts but are still accountable for their own actions.

In an LLP, partners are not responsible for the wrongful acts of other partners or the partnership's debts and obligations. This is a preferred structure for professional services such as law and medicine.

Changing an existing partnership to an LLP is simple. A partnership files an application to register as an LLP with the relevant state agency, and there is no need to change the existing partnership agreement unless desired.

All states require disclosure of the partnership's name and main business location. Some states also need to know the number of partners, a brief description of the business, and a statement about maintaining insurance and the potential expiration of limited liability status.

To form an LLP, you must file specific documents with the secretary of state. While it provides more protection than a general partnership, it does not offer complete protection like a limited liability company (LLC).

Advantages and disadvantages of a partnership business

Advantages:

• Ease of formation: Partnerships are relatively easy to form, with minimal legal formalities.

• Shared resources: Partners can pool their resources, skills, and expertise, leading to better decision-making and business growth.

• Profit sharing: The profit-sharing model motivates partners to work towards the business's success.

• Flexibility: Partnerships offer flexibility in management and decision-making, allowing quick responses to business needs.

• Tax benefits: Partnerships may benefit from certain tax advantages compared to corporations.

Disadvantages:

• Unlimited liability: In general partnerships, partners have unlimited liability, risking personal assets.

• Potential conflicts: Differences in opinion and conflicts among partners can disrupt business operations.

• Limited life: The partnership may dissolve if a partner leaves or passes away.

• Shared profits: Profits must be shared among partners, which can sometimes lead to disagreements.

• Lack of continuity: Partnerships might face challenges in ensuring continuity, especially in the absence of a well-defined agreement.

Comparing the 4 partnership business types: LLC vs. LLP vs. LP vs. GP

Conclusion

Partnership businesses offer a flexible and straightforward approach to business formation, particularly for small and medium-sized enterprises in India. Each type of partnership, from general partnerships to limited liability companies, comes with its own set of advantages and challenges. Choosing the right partnership structure depends on factors such as liability, management preferences, and long-term business goals. For businesses considering expansion or needing additional capital, securing Bajaj Finserv Business Loan can provide the necessary financial boost to support growth and stability.