Partnership Business: Definition, Types & Examples

During the life of your company, you can be led to create a partnership business. But, I know it’s complicated to set up, it seems like nobody really knows how it works and what are the different types that exist. 🧐

Prepare yourself, we’re going to deep dive into the partnership world. After this, you’ll know everything you need to know if you want to create one for your business.

Put on your seatbelt, here we go for a complete tour on partnership business! 🔥

 

Partnership Business Definition

What is a Partnership in Business?

A business partnership is when two or more people or companies team up to run a business together. 🤝

It means they share in the profits and losses of the business, and usually have a partnership agreement that lays out how the business will be run and how profits will be divided.

Partnerships can be a great way to combine resources, skills such as marketing, sales or technical expertise and expertise to achieve a common goal, but it’s important for everyone involved to understand their roles and responsibilities before diving in.

It’s also worth noting that business partnerships can be dissolved if things don’t work out as planned. 💔

For example, if the partnership is no more profitable for one of the two companies, it’s possible to end the partnership as soon as one of them wants to.

It’s a warranty which is necessary to reassure the two parts before signing the partnership contract. ✍️

 

What are the Different Types of Partnership Business?

Partnerships can take many forms, including general partnerships, limited partnerships, and limited liability partnerships for the most famous types.

Each one has its own use case, advantages et disadvantages. Let’s see, when you need to choose one or the other. 🙌

 

The General Partnership

A general partnership is when a group of people or companies decide to join forces and start a business together. They share the profits and losses, and all partners have an equal say in how the business is run.

This means that all partners can make decisions, sign contracts and borrow money for the business. All partners also have the right to look at the business’s financial records and get involved in managing the business. 👀

But with these rights also comes big responsibilities. All partners are jointly and individually liable for the business’s debts, which means that if the business can’t pay its debts, creditors can look to any of the partners for payment. 💰

It’s important to note that a general partnership doesn’t have a separate legal identity from the partners, and it can’t issue stocks or raise money through an initial public offering (IPO). Also, all partners will be taxed on their share of partnership income, whether it is distributed to them or not.

Overall, a general partnership is a simple and flexible way to start a business, but it also exposes partners to unlimited liability and the potential for disagreements among partners. It’s always a good idea to have a clear understanding of everyone’s roles and responsibilities before diving in. 😉

 

The Advantages of a General Partnership

Setting up a general partnership is advantageous for many reasons, which includes:

1. The flexibility: The biggest advantage of general partnerships is that they are relatively easy to set up and dissolve, making them a flexible business structure. 👌
2. A shared management and control: All partners have the right to participate in the management and control of the partnership, which can help ensure that the business is run in the best interests of all partners.
3. Access to a wider range of resources: Partners can pool their resources, skills, and expertise to achieve common business goals. 🎯
4. Taxation: Partners are only taxed on their share of partnership income, which can result in lower tax liability for the partners compared to other business structures.

 

The Disadvantages of a General Partnership

In certain cases, implementing a general partnership is not the best solution. Here are some reasons:

1. Unlimited liability: All partners are jointly and severally liable for the partnership’s debts, which means that each partner is individually liable for the partnership’s debts and creditors can look to any of the partners for payment.
2. Potential for disagreements: A shared management operating is great to ensure each one interests, but it can create disagreements on how to run the business or where they want it to go, which can lead to the dissolution of the partnership. 💔
3. Lack of continuity: A general partnership dissolves upon the withdrawal, retirement, death, bankruptcy, or incapacity of a partner, which can be disruptive to the business. So you better choose carefully your associates!
4. Limited ability to raise capital: As we said before, general partnerships do not have the ability to issue stocks or raise capital through an IPO and rely mostly on partners’ capital. It’s better to have funds that permit you to run the company well! 💸

 

The Limited Partnership

A limited partnership is a business structure where there are two types of partners: general partners, and limited partners. Let see what are these two statuses. 👀

General partners manage the day-to-day operations and have unlimited personal liability for the partnership’s debts. They are also responsible for making business decisions and managing the partnership’s assets.

Limited partners, on the other hand, do not participate in the management of the business and have limited personal liability for the partnership’s debts (usually just the amount they have invested in the partnership). 🙅

This type of partnership is often used in two situations: The first one is when investors want to invest in a business without being actively involved in the management.

The second situation is when investors want to invest in a business without taking the risk of unlimited personal liability. They are also often used in Real Estate or venture capital. 🏡

 

The Advantages of a Limited Partnership

Creating a limited partnership has advantages, such as:

1. Limited personal liability for the limited partners. It means their personal assets are generally protected in the event that the partnership incurs debt or loses money.
2. Time-saving for the limited partners. The ability for limited partners to invest in a business without being actively involved in the management.
3. The potential for a larger pool of capital for general partners, as limited partners, can provide additional funding for the business. 💰

 

The Disadvantages of a General Partnership

But it also has some disadvantages, including:

1. Limited partnerships are more complex to set up and maintain than other business structures, such as general partnerships, and may require legal assistance to establish. 🧑‍⚖️
2. Limited partners’ liability is usually limited to their investment, which means that they may lose all or part of their investment if general partners take bad strategic decisions.
3. The general partners have unlimited personal liability. It means that they can be held personally responsible for all the partnership’s debts and obligations, which can be a significant risk.

 

The Limited Liability Partnership

A limited liability partnership (LLP) is a type of partnership in which the partners have limited personal liability for the debts and obligations of the partnership. 🤝

This means that the partners’ personal assets are generally protected in the event that the partnership incurs debt or loses money.

In an LLP, partners are still jointly and severally liable for their own wrongful actions or omissions, but not for the wrongful actions or omissions of other partners. Each partner is considered an agent of the partnership and has the authority to bind the partnership in contracts and transactions. 📑

LLPs are often used by professionals such as lawyers, accountants, and architects, as they provide the personal asset protection of a corporation while allowing the tax benefits of a partnership.

They also offer flexibility in management, with partners able to participate in the management of the business and share in the profits.

 

The Advantages of a Limited Liability Partnership

The main advantages of a Limited Liability Partnership are:

1. Partners benefits from a Limited personal liability, meaning their personal assets are protected in the event of partnership debts or losses. 📉
2. Tax benefits of a partnership, as profits and losses flow through to the partners and reported on their individual tax returns.
3. Continuity of the business even if one of the partners leaves or dies. 👋
4. Separate legal entity which can enter into contracts, own assets, sue or be sued in its own name.

 

The Disadvantages of a Limited Liability Partnership

A LLP also has disadvantages, such as:

1. The complexity in formation and maintenance, as it is a highly regulated structure and requires compliance with various laws and regulations. 🧑‍⚖️
2. The cost of setting up and maintaining an LLP may be higher than other business structures.
3. Record keeping and compliance requirements may be more extensive than other forms of partnership. 💸

 

Partnership Business Examples

Okay, now that you know all the main type of business partnerships, let’s see a few examples that will help you understand better how each one works. 😄

 

An Example of General Partnership Business

For this example, let’s say we have John and Sarah. They’re two local restaurant owners, and they want to create a new restaurant together. 🧑‍🍳

They both have experience in the restaurant industry and decide to combine their resources, skills, and expertise to open this new restaurant.

In order to do this, they contribute equal amounts of money and share profits and losses equally and make all business decisions together. Furthermore, they are both responsible for the management and operation of the business. 👀

John and Sarah are now general partners, and their partnership is considered a general partnership. 😄

 

An Example of Limited Partnership Business

In order to help you understand how a limited partnership work, here’s what it could look like:

We have Jane, who is a real estate agent with years of experience and a great track record of selling properties in the coastal area. 🏠

She wants to expand her business and invest in more properties, but doesn’t have enough capital. She decides to form a limited partnership with her friend, John, who has experience in property management but doesn’t have much experience in sales negotiation.

Jane acts as the general partner and manages the day-to-day operations of the business. She’s responsible for finding properties to buy, negotiating deals and selling them.

John, as the limited partner, provides the capital for the business and manages the properties once they are purchased. He also takes care of the bookkeeping and paperwork.

Together, they form “Coastal Real Estate Partners” and start buying properties to resell them at a profit. They agree that profits will be shared in a specific ratio, and that the partnership will last for a specific period of time.

This way, Jane can expand her business, and John can invest his money in a profitable venture! 🤑

 

An Example of Limited Liability Partnership Business

For this last example, we’re going to talk about a partnership in the architecture field.

Tom and Emma are both experienced architects who have been working in the same architectural firm for several years. One day, they decide to leave the firm and start their own architectural practice together, focusing on providing architectural services to commercial and residential clients in the city. 🌆

They decide to form a LLP, called “City Architecture Partners” to protect their personal assets while they are running their business. It allows them to share the profits and losses of the business, and both will be involved in the management of the business.

Tom and Emma will both be general partners, and they will be responsible for the day-to-day operations of the business, such as providing architectural services, managing staff and finances, and developing the business. They will also share the decision-making authority and will be able to enter into contracts on behalf of the partnership.

This way, Tom and Emma can start their own business, providing architectural services, with the protection of a LLP, and the freedom to operate their own business within the LLP framework, and they can divide the profits among themselves as they agree. 😊

 

Partnership Business Contract Template

To create a business partnership business contract, you need to be comfortable with contract creation (formal sentence formulas, adding all the necessary information to the contract…)

You can use this template so that you don’t forget anything. 👇

BUSINESS PARTNERSHIP CONTRACT

Company:

Date:

Addresses:

1. PARTNERSHIP NAME AND ACTIVITY

1.1 Nature of activities:

1.2 Name:

1.3 Official address:

2. TERMS AND CONDITIONS

3. CONTRIBUTION TO THE PARTNERSHIP

Explain here the terms of contribution, the type of partnership and how the missions will be carried out by both parties.

4. BANKING AND FINANCIAL TERMS

Include the payment terms of the parties, if any. Some partnership agreements do not include financial compensations, this should also be stated.

5. MANAGEMENT OF PARTNERSHIP ACTIVITIES

Add the actions that will be carried out by both parties with a notion of temporality and responsibility.

6. NON-COMPETITION CLAUSE

7. JURISDICTION

Add the important rules of law, directly linked to the partnership project (for example: the obligation to carry out the project).

 

Conclusion: Partnership Business

In this article, we’ve seen the 3 main types of partnership business structures: the general partnership, the limited partnership and the limited liability partnership.

These 3 types have their respective advantages and disadvantages. Now, you got all the keys to choose the one which fit best with your needs. 😎

The examples we’ve seen, give you an overview on what could each of these types of business partnerships look like. I hope it’s crystal clear now!

 

FAQ of the article

How to start a partnership business?

If you want to start a business partnership, there are several steps to follow:

1. Choose your partners: Carefully choose the individuals or entities you want to go into business with. It’s important to have partners who complement your skills and experience, and who share your vision and values. 🤝
2. Define the partnership agreement: This document outlines the rights and responsibilities of each partner, the distribution of profits and losses, and the process for making decisions and resolving disputes. It should also include details on how the partnership can be dissolved and what happens to the business in the event of a partner’s death or departure.
3. Register your partnership: Depending on the state or country you want to establish your partnership, you may need to register it with the state government, including obtaining any necessary licenses and permits.
4. Develop a business plan: A business plan will help you define your target market, your products or services, your pricing, and your marketing and sales strategies. 💡
5. Launch your business: Once you have completed these steps, you can officially launch your partnership business. Let the journey begin! 🥳

 

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Well, that’s it! I think now you got all the main information needed to launch your business! All I have left to do now, is to wish you the best of luck in your future partnership business!