Advantages and disadvantages of business partnerships

Citizens Staff

A business partnership is created when two or more people — typically with similar expertise and training in one field such as accounting, finance, medicine or law — join forces. Roles and liability for each person in a partnership can vary from one type of partnership to another, which provides flexibility to create a structure that aligns with business objectives.

One of the best ways to understand business partnerships is to learn about their advantages and disadvantages. Check with legal, tax and financial advisors before making a final business partnership choice.

The advantages and disadvantages of a business partnership

The type of partnership and the specifications in a partnership agreement shape each partner's liability and responsibility. Some typical advantages and disadvantages include:

Business partnership advantages

• Quicker and less expensive to form than a corporation.
• Provides potential tax advantages, since profits and losses are passed through to partners' personal tax returns, as opposed to the partnership paying business taxes. In some corporations, on the other hand, taxes must be paid at the corporate level and on any profit payouts to owners and shareholders.
• Partnerships offer flexibility in terms of who has operational and decision-making responsibilities and liability. This may include “silent partners,” who only contribute capital and are not part of company operations decisions, and general partners who assume more liability than others.
• Combined skills and problem-solving capabilities may help with business operations.

Business partnership disadvantages

• Partnerships do not establish a separate legal and financial entity, as a corporation would. Without a corporate entity to assume responsibility, some or all partners in a business partnership may be personally liable for the debts and errors of others, depending on the type of partnership.
• Partnerships can result in disagreements about company operations, including growth strategies, financial investments and exit strategies. Some examples of contentious discussion topics include how much money to invest, how differences of opinion are resolved and what to do if a partner wants to leave.
• States may vary in the type of partnerships allowed, which limits partnership options if you operate in more than one state.

Types of business partnerships

Your choice of business partnership type could provide advantages and mitigate some disadvantages. It is important to work with your attorney and tax expert to choose the best partnership option and to craft a partnership agreement that all partners feel confident signing.

General partnership

A general partnership is the easiest and cheapest to form and is created when partners develop and sign a partnership agreement. In a general partnership, profits are typically split evenly, and each partner is allowed to enter into contracts or financial obligations. Each partner has personal responsibility for what other partners commit to or engage, and the partnership is automatically dismantled if a partner dies or enters into bankruptcy.

Limited partnerships (LPs)

Limited partnerships are an option in which responsibilities and liabilities vary by type of partner. In a limited partnership, at least one partner must be a general partner and assume full personal liability, financial and otherwise. At least one other is a silent partner, who is only liable for anything invested in the partnership. A silent partner does not typically participate in the management or day-to-day operations of a partnership.

Limited liability partnerships (LLPs)

Limited liability partnerships (LLPs) limit the liability that each partner assumes for the other partners and are favored by professionals, including lawyers, doctors, accountants and consultants. For example, if one partner is sued for malpractice in an LLP, the assets of the other partners may not be at risk. Partners can make other distinctions in an LLP around who has equity and who is just paid a salary.

Limited liability limited partnership (LLLP)

In some states, you can also form an LLLP to provide liability protection for a general partner. Like in an LP, a general partner or partners run the business but, unlike in an LP, the LLLP spreads liability across all partners to limit general partners' liability. Since LLLPs are only available in some states, this type of partnership may not make sense if your partnership will operate in multiple states.

Each type of partnership offers distinct flexibilities and protections that impact how a business is formed and managed. Weighing the advantages and disadvantages of each is an important step toward establishing the strongest partnership structure for your business. Another important part of starting strong is establishing business checking account. A business checking account can contribute to business credibility, keep business and personal finances separate, and streamline financial management. Look for an account that offers mobile banking, overdraft protection, and invoicing and accounting tools.

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