January 18, 2022


Accounting + Finance Blog

Three types of Partnership Business you should know

Three types of Partnership Business you should know

Partnership business is reserved for certain vocations. Law firms, accounting firms and some types of consulting firms are not allowed to form a company. Venture capital firms also cannot form a company. This is because of the risk involved and someone must be held accountable.

However, in establishing a partnership, the individuals can decide any three types of partnership business discussed below:

General Partnership (GP)

This is a business where all the partners are responsible for the failure of the business. In the case of bankruptcy, each partner will have to let go not only their capital but also their personal possessions.

Here, all the partners are general partners. Since they have equal risk, they may contribute equal capital and share profit equally.

Also, the partners take part in the daily operations of the business. Each responsible for their respective departments. Were a partner signed a contract, that contract is binding to all other partners. If a partner faces litigation everyone of them will suffer for that litigation.

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Limited Partnership (LP)

In this type of partnership, there must be at least one general partner while the others are limited partners. The general partner bears all the risks of the business. This includes the event of bankruptcy.

The general partner may path-with his personal belongings if the assets of the business cannot pay all debts. But the limited partners will lose only his capital contributed to the business.

LP applies when the limited partners are merely investors to the business. Therefore, investors can only lose the amount invested therein. Therefore, limited partners are not involved in the decision making of the business.

However, caution must be taken on the part of the limited partners. If a limited partner signs a contract for the business that contract is binding to him or her. And if something goes wrong, he or she is not free from the consequences.

Limited Liability Partnership (LLP)

In this form of partnership, all the partners have limited liabilities. This type of business is allowed in certain developed countries such as the United Kingdom and the United States.

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Where it is applicable in your country, you have to meet a lawyer for advice. Most LLP is for certain professionals. Lawyers, Accountants and Doctors may be allowed to form this type of business.

In the event of bankruptcy, the partners will lose their capital contribution to the business. In LLP all partners may be responsible for their various departments and involved in the decision making of the entity.

To wrap it up. There are majorly three types of partnership. Each type has its disadvantages. Running a partnership business is a better alternative to sole proprietorship as more capital will be available. And the burden of decision making will be within the partners instead of a single person.