Types of Business Partners

A partnership is any form of business that has more than one legal owner and operative, but is not incorporated. The different types are distinguished by what legal limitation is placed on one or more partners in two senses: liability for company debts and liability for the actions of other partners in carrying out the work of the business.

General Partnership

This is a setup in which two or more individuals run and own a business together. Usually all profits and losses will be split equally, though a special arrangement may be made if one person contributes more time or skill to the operation of the business. From a legal perspective, both partners are jointly and equally liable for any debts the business acquires, meaning that if it fails, their personal assets may be at stake. For tax purposes, a partnership files a separate return covering its business activities, but the tax liabilities are then passed on to the individuals. While a general partnership needs a written agreement, the business doesn't usually have to be registered with a state authority.

Limited Partnership

This is similar to the running of a general partnership, but contains a mix of general partners and limited partners (at least one of each). While the general partners remain personally responsible for the business's debts, the limited partners are legally liable only for losses up to the amount of money they put into the business. The most common reason to have a limited partnership is where the limited partner joins an existing company that needs a financial injection and requires limited status as a condition of the investment. Usually a limited partnership arrangement will have to be registered with a state authority. At least one partner must retain financial liability for the company's debts; the only way to avoid this is to incorporate the company.

Sleeping Partner

A sleeping partner is one who invests money in a business and takes a share of profits but does not get involved with the day-to-day running of the business. This can happen with both a general and limited partnership, and being a "sleeping" partner does not inherently have any legal force beyond what is included in formal partnership agreements. Such agreements are needed to make clear exactly what say the sleeping partner has in any business decisions.

Limited Liability Partnership (LLP)

This is a form of general partnership set up in a way that means each partner is not personally liable for another partner's negligence. This liability does not refer to debts but rather to financial damages that result from the operation of the business. This partnership is most commonly used in businesses offering professional services, such as lawyers. Such a partnership will usually need to be registered with a state authority. It is possible to combine this type of partnership with one where one partner's liability for business debts is also limited. This is known as a limited liability limited partnership, or LLLP.

References

• Washington State Department of Licensing: Types of Business Structures
• Internal Revenue Service: Partnerships