How does a Partnership works in Business?

Starting a business involves making many important decisions, especially in terms of choosing the right form of business structure. Take the time to research your options and understand how each major organizational structure works. This can help you make the best choice for your company. One of the main forms of various business structures is the partnership.

A partnership is a formal arrangement by two or more parties to organize, operate and share the profits of a business. In it the parties, called business partners, agree to cooperate to advance their mutual interests. Partnerships can be formed in several ways, in some all partners share their liabilities and profits equally, while in others the partners may have limited liability.

It also includes the so-called “silent partner”, in which one party is not involved in the day-to-day operations of the business. In the broadest sense, a partnership can be any endeavor undertaken jointly by more than one party. These parties can be governments, non-profit organizations, businesses or private individuals. Partnership objectives also vary widely.

Types of Partnerships

There are three main types of partnership within a for-profit business started by two or more persons: 

• general partnership, 
• limited partnership and 
• limited liability partnership.

General Partnership: 

In this, all parties share legal and financial liability equally. Individuals are personally liable for the debts incurred in the partnership, while the profits are shared equally. The details of the distribution of profits are almost certainly spelled out in writing in the partnership agreement.

Limited Partnership: 

It is a hybrid of General Partnership and Limited Liability Partnership. At least one partner must be a general partner with full personal liability for partnership debts. 

There is at least one silent partner whose liability is limited to the amount of his investment. This silent partner usually does not participate in the management or day-to-day operations of the partnership.

Limited Liability Partnerships (LLPs): 

This is a joint structure for professionals, such as accountants, lawyers, and architects. This arrangement limits the personal liability of the partners, for example, if one partner is sued for malpractice, the assets of the other partners are not at risk. 

Some law and accounting firms further distinguish between equity partners and salaried partners. Salaried partners have no ownership stake but are typically paid a bonus based on the firm's profits.

Differentiation of partnership from others

A partnership is a way of forming a business, involving two or more persons (partners). It involves a contractual agreement (partnership agreement) between all partners, which sets out the terms and conditions of their business relationship, including ownership, liabilities, and the sharing of profits and losses. A partnership outlines and clearly defines business relationships and liabilities.

However, unlike limited liability companies (LLCs) or corporations, partners are held personally liable for any business debts of the partnership, which means that creditors or other claimants lie behind the partners' personal assets. Can go. For this reason, individuals who wish to create a partnership should exercise extreme caution when selecting partners.

Reason for forming a partnership

Now the question is, if the partners do not have limited liability, then why from a partnership? 

Partnerships have many advantages. They are often easier to set up than limited liability companies or corporations and do not involve a formal incorporation process by the government. It offers the added benefit of not being subject to the same rules and regulations that apply to corporations and limited liability companies. Partnerships are also more tax-friendly.

Limited Partnership

In limited partnerships (LPs), there are general partners who run the firm's operations and have full liability, while limited (silent) partners, who are frequently passive investors or otherwise involved in day-to-day operations does not include, enjoy limited liability. It is different from Limited Liability Partnership (LLP).

Partners in a limited liability partnership are not exempt from liability for partnership debts, but they may be exempt from liability for the actions of other partners. A limited liability limited partnership (LLLP) is a relatively new business form that combines aspects of LPs and LLPs.