There are three relatively common partnership types: general partnership (GP), limited partnership (LP) and limited liability partnership (LLP). A fourth, the limited liability limited partnership (LLLP), is not recognized in all states.
There are often distinct reasons why business owners choose each of these partnership types, which are explained below.
What is a general partnership (GP)?
A general partnership (GP) is the most popular form of business partnership, In a GP, a minimum of two business owners share the business’ profits, losses, and liabilities.
To form a GP, each partner enters into a written partnership agreement. Unlike LLPs, LLCs, and corporations, no formation documents are required to be filed with the state. If there is no agreement, the business’ profits and losses are distributed equally among the partners.
In addition, there is no liability protection. Partners have unlimited personal liability for all business debts and liabilities, and any partner can commit the business to obligations.
In a general partnership, income is passed directly to the owners. As a result, each partner reports their portion of the partnership's profits or losses on their personal tax returns. The partnership itself is not subject to taxation.
Reasons for choosing a general partnership
- Ease of creation. No state filing is required. The partnership is created when the partners begin business activities.
- Low cost of operation. Because general partnerships are not formed through a state filing, they are not required to pay a formation filing fee, ongoing state fees or franchise taxes. The partnership must still obtain the business licenses and permits required for operation, however.
- Few ongoing requirements. Unlike corporations, general partnerships are not required to hold annual meetings of the owners, issue partnership interest, and keep personal assets separate from business assets. A partnership agreement that outlines how the partnership will be managed, the roles of each partner, and what events will cause the partnership to end operations is recommended.
What is a limited partnership (LP)?
A limited partnership is a specialized form of partnership, similar to a general partnership, but comprising at least one general partner and one or more limited partners.
Forming a limited partnership also requires additional steps compared with a general partnership. In most instances, an LP is formed by filing a certificate of limited partnership with the Secretary of State’s office. LPs are also required to have a partnership agreement and publicly disclose their LP stats by having the LP designation in the company name.
LPs must also file a beneficial ownership information (BOI) report with FinCEN (unless it qualifies for an exemption).
In an LP, general partners are designated control over the entity’s management, operations, and use of capital. They also have full liability for partnership debts.
However, limited partners have limited exposure to liability (only up to the amount of their investment). And, unlike general partners, they are not involved in the daily management of the LP. For this reason, limited partners are also referred to as silent partners.
From a tax perspective, a limited partnership’s profits and losses are allocated to limited partners in line with the terms of the partnership agreement and the value of their financial contributions. Limited partners are not subject to self-employment tax on their share of net earnings from the partnership; only the general partner of the limited partnership is responsible for paying this tax.
In addition, the general partner usually receives a management fee, which is deducted from the partnership income. Limited partners receive a share of the profits only after the general partner has been fully compensated for their services on behalf of the business.
Reasons for choosing a limited partnership
- Unlimited liability for general partners only. In a limited partnership (LP), at least one partner has unlimited liability—the general partner(s). The other partners (limited partners) have limited liability, meaning their personal assets typically cannot be used to satisfy business debts and liabilities. The amount of their liability is limited to their investment in the LP.
- Limited partners are not involved in management. The general partners oversee the day-to-day operations of the LP. Limited partners are basically silent investors.
- Short-term projects/ventures. LPs are often the business type of choice for special situations versus true businesses. For example, films are often formalized as LPs and family estate planning often utilizes LPs.
What is a limited liability partnership (LLP)?
A limited liability partnership (LLP) is a partnership where all partners have limited liability and can participate in the management of the partnership.
Similar to limited partnerships, LLPs are formed through a filing with the Secretary of State’s office. However, state laws vary and the LLP structure is often limited to certain businesses.
For example, in some states, an LLP is limited to professional services, such as doctors, attorneys, and others who typically require a state license to operate. Oftentimes, an LLP is the only option available to certain businesses when forming a partnership. For example, in California, licensed professionals, including doctors, lawyers, and architects, can form an LLP or professional corporation (PC), but can’t form an LLC. For more information, see LLC vs. partnership.
LLPs must also file a beneficial ownership information (BOI) report with FinCEN, unless it qualifies for an exemption.
Reasons for choosing a limited liability partnership:
- Professional service businesses. Limited liability partnerships often can only be created by certain types of professional service businesses, such as accountants, attorneys, architects, dentists, doctors, and other fields treated as professionals under each state’s law.
- Personal asset protection. The personal assets of the partners in an LLP typically cannot be used to satisfy business debts and liabilities. The LLP does not shield the partners from liability for their personal acts. Put simply, the LLP cannot limit the liability of owners for their malpractice.
Tax considerations for partnerships
General partnerships, limited partnerships, and limited liability partnerships are all taxed the same. No tax is paid by these three forms of partnerships. Form 1065 is filed with the IRS, as well as a Schedule K for each owner. The Schedule K lists the owner’s share of the partnership’s income, expenses, etc.
Liability considerations for partnerships
Keep in mind that general partnerships offer no liability protection to the owners. The owners are legally considered the same as the business, and personal assets can therefore be considered business assets.
Additionally, partners in a general partnership bear responsibility for the actions of the other partners. General partnerships are undoubtedly the easiest to create and have the lowest ongoing costs, but they also provide the highest risk to the partners.
