TYPES OF BUSINESS PARTNERSHIPS IN THE US

What is a Business Partnership?

Business partnerships are the association of two or more people or entities. They pool up their financial resources and management skills to run a business and then share the profit or loss in an agreed ratio. The running of the business operations does not involve all the business partners. One or more of them may only be a silent business partner who only invests the capital in the business. Their liability is limited to the amount contributed to the business. For this reason, they, sometimes, are also known as limited partners. A formal written agreement is signed by all members of the business partnerships. This agreement includes the terms, conditions, responsibilities, and liabilities, etc. To register a partnership, this agreement is presented to the state department responsible for registering a partnership.

Type of Business Partnerships

Following are the commonly known types of Business Partnership in the United States:

• General Partnership Business (GP)
• Limited Partnership Business (LP)
• Limited Liability Partnership (LLP)
• Limited Liability Company (LLC)
• Limited Liability Limited Partnership (LLLP)
• Joint Venture (JV)
• Public-Private Partnership (PPP)

General Partnership Business

In this type of business partnership, the finances, workload, liabilities, profits, and losses are shared among the partners as per an agreed ratio. A General Partnership is not required to be registered with the state. Sometimes, it even does not require a formal agreement. As two or more persons jointly start doing a business for profit, they, by default, are considered to be in a General Partnership.

The business operations are actively managed by all partners and no personal liability protection is available. An action or decision by any one of the partners will have its positive or negative impact on each one of them. Looking at the dark side of the picture, this means that the personal assets of all the partners are at risk in case the company is sued or cannot retire its financial obligations. It is, therefore, very important to find a business partner wisely.

Limited Partnership Business

In a Limited Partnership or Limited Liability Partnership, there should be one or more general partners who remain responsible for their decisions and there should be at least one ‘silent partner’. The silent partner only invests the capital, does not take part in daily business operations, and has no contribution to the policy decisions. The liability of such a business partner is limited and therefore, sometimes, is referred to as a ‘limited partner’.

The limited partners invest for financial returns and are not responsible for debts and liabilities of the business that remain to be on the general partners. This means the limited partners cannot lose more than their investment.

The primary benefit of this type of partnership is that the personal assets of the limited partner are legally protected regardless of the ownership percentage based on the financial contributions. For this reason, a limited partnership is more attractive to investors who have funds available to legally park in a business without taking the risk of actually running it. Contrarily, there is no legal protection available to the general partners between their assets and the business.

If limited partners start taking part in managing the business, their status as a limited partner is lost along with its protections. If you’re a limited partner, be careful about the activities you do and the decisions you make in the partnership.

Unlike a general partnership, the limited partnership must be registered with the relevant state department. This type of partnership is useful for raising funds for startups and when additional funds are required to finance a particular business activity or to implement a business expansion plan.

Limited Liability Partnership (LLP)

It is a common business structure for professionals, such as doctors, accountants, lawyers, and architects, etc. Each partner is responsible for his professional act. Any partner is not liable on account of the independent or unauthorized action of other partners. Therefore, individual partners are protected from a joint liability resulting from wrongful business decisions or professional misconduct of an individual partner.

The LLP can enter into contracts and hold physical assets in its name. Therefore, the LLP is liable to the full extent of its assets but the liability of the partners is limited to their agreed contribution in the LLP. It is easier to add or remove partners in the LLP.

Some professional firms discriminate between equity partners and salaried partners. The latter have no ownership stakes in the business but they generally get bonuses based on the business profits.

A formal agreement defines the mutual rights and duties of the partners within an LLP. The changes in partners have no impact on the continuity of existence of the business under this type of partnership.

In the LLP, all partners actively participate in managing the business while their liabilities remain limited and protected from the wrongful actions or decisions of other partners. However, all the partners bear full responsibility and legal obligations related to the business while they are not held responsible for the errors and omission of the fellow partners.

Limited Liability Company (LLC)

It is a business structure in the United States that has a mix of the characteristics of a corporation and a partnership or sole proprietorship. The nature of the limited liability is similar to that of a corporation.

An LLC partnership has two or more owners referred to as members. These companies with multiple members are called multi-member LLCs or LLC partnerships. The personal assets of the owners of an LLC are protected from the company’s debts or liabilities. Their assets are, therefore, protected and they cannot be sued for the business’s actions or debts. However, any action by a member becomes the liability of all the members especially if they knew that the lawsuit was due to the negligence of any of their fellow members. This is one of the drawbacks of this type of business partnership.

In many partnerships, personal liability protection is available only to the limited partners whereas in LLC all the partners (members) have this facility available to them.

Most types of businesses can opt to structure their business as an LLC as it is easier to set up than a corporation and provides better protection and flexibility. Many states in the US don’t restrict ownership of LLC. Anyone can become a member including individuals, corporations, foreigners, foreign entities, and even other LLCs. This flexibility is not possible in other types of partnerships. Some entities are not allowed to form or become a member of an LLCs e.g., banks, insurance companies, and some more.

An LLC is the most appropriate type of business structure for investment management businesses including hedge funds. Two layers of LLC are involved in structuring hedge funds. In the first layer, LLC is owned by the fund’s investors, and in the second layer, LLC is appointed for managing that fund. In such an arrangement, the individual managers involved in making investment decisions enjoy two layers of liability protection.

Advantages of LLCs

• • Unlike corporations, an LLC is not required to hold regular meetings thus unnecessary paperwork is avoided and the time of the managers is saved.
  • There is no limitation on the number of shareholders or the members in an LLC.
  • The cash method of accounting is possible and practiced in LLCs i.e. income is not considered as earned until it is received.
  • LLC members can place their membership interests in a living trust.
  • The profits can be passed on to the individual investors therefore, the issue of double taxation is avoided.

Disadvantages

In a corporation, only salaries are subjected to self-employment taxes whereas in an LLC, the salaries, as well as the profits, are subjected to such taxes. I some cases, therefore, the LLC owners end up paying more taxes than the owners of the corporations.

Limited Liability Limited Partnership (LLLP)

It is a new and relatively uncommon variety in the type of business partnerships. It is a modified version of a Limited Partnership as the LLLP limits the general partner’s liability so all partners have liability protection, but limited partners still have typically had no say in how the business is run. This liability protection is still not any better than as in corporations and LLCs.

A major drawback of limited partnerships is that a general partner is exposed to nearly unlimited liability for the debts of the partnership. However, in LLLPs, the protections available to the limited partners are also available to the general partners.

The LLLP is not recognized in all states. Therefore, LLLPs are not a good choice if the business operations are spread over multiple states. Furthermore, the liability protections in an LLLP haven’t been tested thoroughly in the courts.

An LLLP can do virtually anything a regular LP, LLC, joint-stock company, or sole proprietor can do including buying and selling stocks, bonds, mutual funds, and US savings bonds, etc. The real estate sector is an example where the LLLP structure of the business is very popular especially when a group of investors gets together to build a hotel, an apartment building, a commercial plaza, etc. Other businesses such as car dealerships, publishing firms, scientific laboratories, asset management companies, etc. can also opt for this type of business structure.

Joint Venture (JV)

Sometimes, two or more business entities pool their resources and expertise to introduce a new product or service or to gain a tactical and strategic edge in the market home or abroad. As a result, a new business entity, commonly known as a Joint Venture Business, is established that has its legal identity independent of the contributing business entities. Each entity in the JV keeps its separate legal status.

Due to its flexibility, ease of management, and ease of exploring new markets, Joint Ventures as a business alliance are getting attention from the business community from all over the world. Joint Venture Business Partnerships can be formed on any legal structure such as a corporation, partnership, LLC, etc. Sometimes, however, an independent legal entity is not formed and the existing resources and expertise are extended to achieve the objective of the JV through a formally agreed arrangement. Such an arrangement is known as an ‘unincorporated joint venture’.

A JV usually is brought about when a foreign investor wants to buy an interest in a local company, a local firm wants to acquire an interest in an existing foreign firm, or when both the foreign and local entrepreneurs jointly form a new enterprise.

The JV, after its formation, becomes a new entity that is legally separate from its founders who might otherwise be giant corporations. The liability of the JV and its founders is independent of each other except for invested capital. It is legally allowed to contract in its name and acquire rights to buy new companies. And, it can sue or be sued in courts without any legal obligations to its founders.

In a JV, the participants maximize their profits with minimal or no new investment. Each participant in a JV shares the profits, losses, costs, and liabilities as per agreed ratios through a formal agreement.

The JVs are considered the most appropriate form of a business partnership structure when a company is looking to break into a new geographical market. The firsthand knowledge of the local laws of the participant companies plays a major role in the success of the JV.

A joint venture agreement is normally a short-term commitment and provides no hard bounding on both the parties to continue against their will. In some cases, a joint venture is formed for a single project and on completion of the project, the JV is dissolved. In other cases, the JV continues to function till the time the interests of the participants remain attached mainly to financial gains. The formation or dissolution of JVs does not affect the independent legal status of the participating business entities.

The Joint Ventures have the potential of failure mainly due to conflicts between the partners. The common reasons leading to a conflict may be poorly defined objectives, lack of proper communication, the gap between the expectations of the partners, unbalanced sharing of resources, cultural differences are not appreciated, and some more.

Public-Private Partnership (PPP)

It is one of the types of business partnerships between the public sector departments and the private sector companies to deliver a project or a service that is traditionally provided by the public sector. This partnership ensures planning, financing, designing, developing, and maintaining the infrastructure at a minimal cost to the public funds. The private sector also gets an acceptable return on its investment.

Due to the inherent nature of a PPP, this type of partnership works only within the country with no links abroad. Examples of PPP include parks, convention centers, schools, universities, hospitals, waste management, airports, roads for transportation, dams for electricity and water supply and street lights for lighting, etc.

The commercialization or privatization of airports, air navigation services, healthcare services, and alike through PPP arrangement does not exonerate the state from its responsibility for the public safety & security, economic oversight of such facilities, and the international obligations.

PPP projects minimize the bureaucratic hurdles and therefore the projects are completed sooner and potentially increase the transparency. These partnerships usually get concessions from the government in many ways e.g., low tax rates or in some cases a complete tax waiver, liability protection, etc.

PPP can increase the quality, efficiency, and competitiveness of public services. Access to the private sector finance for the benefit of the public is a big plus in this type of partnership. The best use of private sector operational efficiencies can increase quality to the public and the ability to speed up infrastructure development. It also creates better value for the money of the taxpayers, the full life-cycle cost of the infrastructure is reduced, and the high risk involved in infrastructure development is passed on to the private sector.

AUTHOR: Shakil Naz (shakilnaz2015@gmail.com)

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