The Basics of Partnerships: Types & Examples

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  • 0:05 General Partnership
  • 1:28 Limited Partnership
  • 2:25 Limited Liability Partnership
  • 3:40 Limited Liability…
  • 4:31 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Partnerships are a common way to organize a business in the United States. In this lesson, you'll learn about different types of business partnerships and their respective advantages and disadvantages. A short quiz follows the lesson.

General Partnership

Meet Gail and Patrick. Both are attorneys who decide to start a law firm together. They decide to form a general partnership. A general partnership exists when two or more people own a business. Gail and Patrick write a partnership agreement that outlines such things as:

  • The scope of the partnership's business
  • The percentage of the business each partner owns
  • How profits and losses will be allocated
  • How the partnership will be managed
  • Whether new partners can join
  • Selling or transfer of partnership ownership interest
  • Termination of the partnership

A general partnership gives the partners some important advantages. Gail and Patrick have a great deal of flexibility in the design of their partnership. They don't have to deal with a bunch of complex laws and regulations that apply to other business organizations, like a corporation. Partnerships are generally not subject to federal income taxation. Instead, all the profits (or losses) are passed through the partnership to Gail and Patrick, who will report the income (or loss) on their personal tax returns.

The biggest disadvantage of a general partnership for Gail and Patrick is personal liability. Gail and Patrick will be personally liable for the debts and obligations of their partnership. Creditors can pursue Gail and Patrick's personal assets to collect on partnership debt. If someone is injured by the partnership and wins a court judgment, the plaintiff can pursue Gail and Patrick's personal assets to satisfy the judgment.

Limited Partnership

Meet Lilly and Patrica. Lilly is a gourmet baker and Patrica is her wealthy friend. Lilly comes to Patrica about going into business together. Lilly wants to start a gourmet cookie company but doesn't have the start-up capital. Patrica doesn't know a thing about baking but sees a great investment opportunity after hearing Lilly's pitch. They decide to form a limited partnership (often called an LP) and compose a partnership agreement. They'll have to register their new LP with the secretary of state in the state where it is located.

Lilly is the general partner and Patrica is the limited partner. A general partner manages the partnership and is personally liable for the partnership's debts and other legal obligations. Since Patrica is a limited partner, she does not have the right to manage the limited partnership, but she is not personally liable for the partnership's legal obligation. Patrica, unlike Lilly, can only lose her investment in the limited partnership and nothing more. You can think of limited liability as a sort of shield that protects you from liability.

Limited Liability Partnership

Meet Larry, Linda, and Polly. They are three accountants that have decided to form an accounting firm together and opt to organize a limited liability partnership. In order to form the limited liability partnership (LLP), Larry, Linda, and Polly must register their business with their state's secretary of state. Some states will only let certain professionals, like lawyers and accountants, form LLPs.

An LLP provides a significant advantage for Linda, Larry, and Polly over a general partnership. Unlike a general partnership or limited partnership, an LLP provides all partners a degree of limited liability. Some states only provide a partial shield from liability, while other provide a full shield from liability. In partial-shield liability, partners are only free from personal liability caused by the wrongful or negligent acts of the other partners. In a full-shield liability, partners are fully protected from obligations arising from wrongful and negligent acts of their partners as well as contractual obligations. In other words, under full-shield protection, Larry, Linda, and Polly only risk their investment in their accounting firm; they are not personally liable beyond their investment. It's important to note, however, that since Larry, Linda, and Polly are professional accountants, each is still personally liable for their own acts of professional negligence or malpractice.

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