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The Basics of Partnerships: Types & Examples

Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Partnerships are a common way to organize a business in the United States. Learn about different types and examples of partnerships and their advantages and disadvantages. Updated: 10/22/2021

What Is a Partnership?

Let's first understand what a partnership is. When two or more parties come together and agree to cooperate in advancing their business interests, they form a type of business called partnership. The parties are considered the owners of the partnership business, or the partners, and they share the profits, losses if they occur, and also the risks involved.

Partnership Agreement

The information about how the partnership business is operated and the particulars of the agreement between the parties are included in a document called the partnership deed or partnership agreement. The partnership agreement is a legal document, signed by all the parties in the partnership, and it details the roles, duties, rights, and responsibilities of the partners, as well as how the profits and losses should be distributed among them.

Let's now look at the different types of partnerships including general partnership, limited partnership, limited liability partnership, and limited liability limited partnership.

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  • 0:05 General Partnership
  • 1:28 Limited Partnership
  • 2:25 Limited Liability Partnership
  • 3:40 Limited Liability…
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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 their personal assets to collect on partnership debt. If someone is injured by the partnership and wins a court judgment, the plaintiff can pursue Gail's 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 anything about baking, but she 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 a 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.

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