Partnerships, Limited Partnerships, and Joint Ventures

Their Advantages and Disadvantages | How They Differ from Other Business Forms

If you’re contemplating going into business with another person or considering a new cooperative business relationship with another commercial enterprise, you may want to avoid the expense and complexity of creating a limited liability company or corporation. General partnerships, limited partnerships, and joint ventures offer an alternative that may meet your needs.

What Is a General Partnership?

The most common type of partnership is a general partnership. A general partnership is a legal entity, formed by two or more persons, where all owners share equally in rights, responsibilities, and potential liability. In most instances, all partners in a general partnership are involved in the daily operations of the business. The benefits of a general partnership include:

• Ease of formation—A general partnership may be formed with or without a partnership agreement. All you need is to have two or more individuals operating as co-owners and sharing profits.
• Pass-through taxation—With a general partnership, there’s no income tax at the business level. Instead, all income passes through to the partners to be reported on their personal income tax returns.
• Ease of dissolution—A general partnership can be as easy to terminate as it is to establish. Generally, when one partner leaves the partnership or dies, the partnership is legally terminated and a new one must be formed. Subject to the terms of a written partnership agreement, a partnership may be terminated at any time and for any reason.

There are also some distinct disadvantages to setting up a business as a general partnership.

• No limitation of liability—Unless expressly stated otherwise in the terms of a valid partnership agreement, all general partners arejointly and severally liable for the debts and obligations of the partnership. Furthermore, a creditor may seek access to a partner’s personal assets to satisfy the debts of the business.
• Joint and several liability—In a general partnership, all general partners are responsible for the actions of all other partners, whether they had knowledge of or approved of those actions. Accordingly, if one partner executes a contract on behalf of the partnership, all other partners are obligated to honor the terms of that agreement.

What Is a Limited Partnership?

The concept of a limited partnership evolved because of concerns about the liability of general partners, which can serve as a disincentive for investment and involvement in a partnership.

A limited partnership is a legal structure with two distinct types of partners: general partners and limited partners. The general partners are involved in the day-to-day operations of the business, whereas the limited partners usually function only as investors. The limited partners are entitled to a specific payout from the partnership, based on the terms of the limited partnership agreement. As a general rule, after the limited partners receive their distributions, the general partners are entitled to distribution of any remaining profits. However, the limited partners only risk the amount they invest in the business—they cannot be held personally liable for the debts and obligations of the business. General partners, on the other hand, are jointly and severally liable for all debts of the partnership and have no shield from personal liability.

What Is a Joint Venture?

A joint venture is a commercial entity between two or more existing businesses, where the companies agree to certain sharing of ownership, returns, and risks, as well as joint management. A joint venture may be incorporated, with the respective corporations holding all shares of stock; it may be formed as a general or limited partnership; or it may simply be governed by a contractual relationship. As a general rule, a joint venture is formed for a specific purpose and typically has a stated duration.

Unless incorporated, a joint venture is not recognized as a separate legal entity by the Internal Revenue Service. However, a successful unincorporated joint venture can then be formalized in a new incorporated legal entity. For that reason, joint ventures are commonly used by businesses and business owners to experiment with new business arrangements.

Summary

General partnerships, limited partnerships, and joint ventures all offer ways for businesses and business owners to work together for a common goal, but they have distinct characteristics that need to be considered. An experienced and knowledgeable business law attorney can help you determine which business form is in your best interests.