Partnerships are profit-driven relationships between individuals, groups, companies, or corporations. Types include general, limited, and limited liability partnerships, each with varying degrees of personal responsibility and involvement in business operations.
A partnership is a profit-driven business relationship between two or more participants. Participants can be individuals, groups, companies or corporations. Types of business partnerships are generally defined by the role each partner plays in the operation of the business and the amount of personal responsibility the partners assume. Common forms include general partnerships, limited partnerships, and limited liability partnerships.
General partnerships are a common business relationship in most countries. Terms may vary, but partners’ degree of involvement and personal liability remain the same. In this type of partnership, each partner shares control of the business operation and shares any profits. Furthermore, the partners are individually and collectively liable for any and all debts arising from business activity carried out on behalf of the partnership by any partner. Any partner may also contractually bind the partnership, with or without the knowledge or consent of the other partners.
The degree of personal exposure in general partnerships is generally accepted due to tax considerations. If each partner is taxed according to their personal income level, they may face a lower tax burden under this business agreement. A partner may also use trade losses to offset tax liabilities on other investments or ventures. A special working or personal relationship between participants can also make the open nature of this form of partnership attractive.
Limited partnerships consist of a general partner and one or more limited partners. The general partner has exclusive authority to manage and control the business activity. For this reason, the general partner assumes exclusive personal responsibility for the company’s debts and obligations. Limited partners do not actively participate in the management of the business and their personal financial liabilities are limited to the amount invested. By prior agreement, the general partner may be entitled to a larger share of profits than the limited partners.
Another type of partnership, the limited liability partnership, is similar to general partnerships in most respects. Under this agreement, however, a partner cannot be held liable for the consequences of negligence or illegal activity on the part of another partner. Limited liability partnerships, in this sense, have elements of both a partnership and a corporation. Its implementation varies widely between countries and even between jurisdictions within a country. This type of business arrangement accommodates the participants’ desire to have a direct role in management, while being shielded from the actions of other partners that may not be in the best interest of the partnership.
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