Understanding the Different Types of Partnership Structures

Starting a new business can be exciting as well as nerve-wracking. You’ll always feel a bit of fear when you step out into the unknown. Stepping out alone can be a daunting decision for business owners. That’s why having a business partner can make this new adventure a little less frightening.

Going into business with someone can be a great way to chase your dream and start a business with a more assurance and help. There are a few structures to choose from, but before we get into that, let’s dive into the advantages and disadvantages of a partnership first

 

Is It Worth It to Have a Business Partner?

 

Advantages

There are many advantages to having a business partner. You’ll have someone to bounce ideas off of, share some of the risks, and financially support the startup, for starters. Setting up a partnership is also easier and less expensive in comparison to setting up a corporation. When you have a business partner, you have another set of eyes to help you grow the business with a broader range of skills and knowledge to pull from. Plus, you’ll also expand on each other’s customer base and network of contacts. 

Disadvantages

It’s not all sunshine and roses — there are a few disadvantages to being in a partnership. You are your business, there’s no legal separation between the two. You’re personally responsible for the commitments or debts of the business. So if your partner does something to financially or legally burn the company, you’ll also be accountable. Sometimes, they can also ruin relationships when one partner wants to grow the business, and the other does not.
 
Put simply, you’ll be personally responsible for any decisions that your business partner makes
 
Due to these disadvantages, we recommend having an unambiguous business partnership agreement in place. Be clear when structuring the partnership, roles, and responsibilities for all those involved. 

Types of Partnership Structures

If you’re ready to collaborate with someone, here are the types of partnerships you’ll come across in business:

 

General Business Partnership

This is the most basic form of a business partnership. In this situation, each partner is equally liable and involved in the business. Unlike other structures, there’s no formal legal requirement for setting up a general partnership. All you need is a registered trade name, a tax number, and a business bank account. Each partner involved is then taxed individually; the business doesn’t pay taxes. Each partner involved will also be liable for all assets and liabilities of the partnership.

Limited Partnership

Like a general partnership, a limited partnership has one or more general partners with unlimited liability. The difference lies in the fact that there can also be one or more limited partners. A limited partner minimizes their liability in the business based on how much they contribute. A limited partner usually serves the purpose of providing financial support and knowledge or business advice. They don’t take on the same liabilities so long as they don’t involve themselves in the actual operating of the business

Limited Liability Partnership (LLP)

For those looking for more protection than a general partnership, this one’s for you. Professionals like doctors, lawyers, and accountants enter into an LLC due to the limited liability involved. For example, if a customer feels wronged, only the partner involved in the actual work with said client is at risk

Being involved in a partnership can be a blessing if there’s mutual trust and you have the right structure. You have another person to support you and the business. You can draw on each other’s strengths, knowledge and support. But don’t overlook the downsides to partnerships. Understand that many disadvantages are directly related to trust and liability. If you can trust your business partner and are both clear on an agreement, business partnerships are a great way to start a business. If you need some help structuring a new partnership to help maintain trust in your alliance, get in touch today.

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