Understanding the Different Types of Partnerships and Their Key Differences

A partnership is a form of business where two or more people share ownership, as well as the responsibility for managing the company and the income or losses the business generates. That income is paid to partners, who then claim it on their personal tax returns – the business is not taxed separately, as corporations are, on its profits or losses.

There are three types of partnerships:

• General partnership
• Limited partnership
• Joint venture

General Partnership

In a general partnership, each partner shares equally in the workload, liability, and profits generated and paid out to the partners. All partners are actively involved in the business’s operations.

Limited Partnership

Limited partnerships allow outside investors to buy into a business but maintain limited liability and involvement, based on their contributions. This is a more complicated form of partnership, which also has more flexibility in terms of ownership and decision-making.

Joint Venture

Short-term projects or alliances that bring together multiple partners for a project are typically structured as joint ventures. If the venture performs well, it can be continued as a general partnership. Otherwise, it can be shuttered.

Co-ownership

Partnership and co-ownership are two different things. The ownership of a property by more than one person is called co-ownership. If two brothers purchase a property collectively, it will be a case of co-ownership. The property will be disposed off with the consent of all the co-owners. Any income arising out of co-ownership is shared by all the co-owners.

The property is not purchased with the object of earning profits. If a building is purchased to let it for rent, then it will be a case of partnership and not of co-ownership. In the co-ownership, there is only a joint ownership without any business motive. In partnership joint ownership and business are combined.

Difference between Partnership and Co-ownership:

• (i) Contract: Partnership is based on contractual relationship among partners. Co-ownership may be by the operation of law. On the death of father, sons become co-owners of his property. On the other hand, partnership is the outcome of an agreement.
• (ii) Object: The object of partnership is to enter into some business and earn profits. Co-ownership is not meant for business purposes.
• (iii) Transfer of Income: No partner can transfer his interest (share) without the consent of all other partners. A co-owner can transfer his interest at any time and without asking from other co-owners.
• (iv) Agency Relationship: Partners can act as agents of the business. They have implied authority to bind the firm by their acts. No agency relationship exists in co-ownership. Every co-owner is responsible for his own deeds only.
• (v) Division of Joint Property: A co-owner can demand the division of property. Two co-owners may divide a plot of land by erecting a wall on the land. In partnership the division of property cannot be demanded. A partner can demand the payment of his share in business by way of cash.
• (vi) Right of Investment: If a partner spends some money for the business he can demand its reimbursement. On the other hand, if a co-owner spends money for the improvement of property he cannot claim it as a lien on property.
• (vii) Act: Partnership is formed under Partnership Act, 1932 but there is no such act governing co-owners.

Company and patnership

When starting a business, one of the first decisions you will be faced with is what kind of business to register. The type of business you decide on will affect your taxes, liability and how the company is run. If you are undecided on which business structure to choose, examining five major differences between a corporation and a partnership can help you decide the best option for your business.

Structure

Corporations and partnerships differ in their structures, with corporations being more complex and including more people in the decision-making process. A corporation is an independent legal entity owned by shareholders, in which the shareholders decide on how the company is run and who manages it. A partnership is a business in which two or more individuals share ownership. In general partnerships, all management duties, expenses, liability and profits are shared between two or more owners. In limited partnerships, general partners share ownership responsibilities and limited partners serve only as investors.

Startup Costs

Corporations are more expensive and complicated to form than partnerships. Forming a corporation includes a lot of administrative fees, and complex tax and legal requirements. Corporations must file articles of incorporation, and obtain state and local licenses and permits. Corporations often hire lawyers for help with the process. The U.S. Small Business Administration advises only established, large companies with multiple employees start corporations. Partnerships are less costly and simpler to form. Partners must register the business with the state and obtain local or state business licenses and permits.

Liability

In partnerships, the general partners are held liable for all company debts and legal responsibilities. General partners' assets may be taken to pay company debts. Partnerships often include partnership agreements stating exactly what percent of the company each general partner is responsible for, and the percent can vary from partner to partner. Corporations, on the other hand, do not hold individuals liable for the company's debt or legal obligations. The corporation is considered a separate entity and therefore the corporation itself is responsible for assuming all debts and legal fees, and the shareholders are not at risk of losing personal assets.

Taxation

Partnerships do not have to pay business taxes but instead the profits and losses are "passed through" to the individual general partners, according to the U.S. Small Business Administration. Partnerships must file a tax return to report losses and profits to the Internal Revenue Service, and general partners include their share of profits and loss in the return. Corporations are required to pay state and national taxes, and shareholders must also pay taxes on their salaries, bonuses and dividends. The corporate tax rate is usually lower than the individual income tax rate, according to the SBA.

Management

Partnerships have simpler management structures than corporations. In a partnership, all general partners decide how the company is run. General partners often assume management responsibilities or share in the decision of hiring and monitoring managers. Corporations are governed by shareholders, who conduct regular meetings to determine company management and policies. Shareholders often do not have as much day-to-day involvement in the management of the company but instead oversee managers who run the company.