Partnership - As the name states, a partnership is a business owned by two or more people, known as partners. Like sole proprietorships, partnerships are able to take advantage of flow-through taxation. This means that the income is treated as the owners’ incomes so it is only taxed once. Owners in partnerships are responsible for the liabilities of the firm. However, there are some nuances to this. There are different types of partnerships: general partnerships, limited partnerships, and limited liability partnerships.
- General Partnerships: This is the easiest type of partnership to form, with few upkeep costs. Every partner is considered as participating in the operations of the business, and there is unlimited liability for every partner. This means that every partner’s personal assets can be used to repay the liabilities of the partnership. This also means that each partner is responsible for every other partner’s actions.
- For example, John and Dave are in a general partnership. If John is sued for malpractice, Dave’s personal assets may also be claimed against in the lawsuit.
- Limited Partnerships: This type of partnership has at least one general partner. This general partner takes on unlimited liability for the partnership and manages the operations of the company. Additionally, there are also limited partners in limited partnerships. Limited partners only take on as much liability as their financial stake in the business. However, as limited partners, they are not involved in management decisions and do not have any direct control over the company.
- Limited Liability Partnerships (LLP): LLPs are similar to general partnerships, where multiple partners are each responsible for the operations of the business. However, partners in LLPs are not personally responsible for the actions of other partners or the debts of the business. Unfortunately, not all businesses can be LLPs. This type of business is often restricted to certain professions, such as lawyers or accountants.
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