7 Types of Partnership You Should Know About
A partnership is a business structure where two or more people share the ownership, profits, and liabilities of a venture. Partnerships can take different forms depending on the level of involvement, risk, and responsibility of each partner. In this article, we will explore the various types of partnership and their advantages and disadvantages.
1. General Partnership
A general partnership is the simplest and most common type of partnership. In a general partnership, all partners have equal rights and obligations in the management and operation of the business. They also share the profits and losses equally, unless they agree otherwise in a written contract. A general partnership does not require any formal registration or paperwork, but it is advisable to have a partnership agreement that outlines the terms and conditions of the relationship.
The main advantage of a general partnership is that it is easy to set up and run. The partners can pool their resources, skills, and expertise to achieve their goals. They also enjoy tax benefits, as the income and expenses of the partnership are passed through to the partners’ personal tax returns.
The main disadvantage of a general partnership is that it exposes the partners to unlimited liability. This means that each partner is personally responsible for the debts and obligations of the business, even if they are caused by another partner’s negligence or misconduct. Moreover, a general partnership has no legal identity separate from its partners, which means that it cannot own property, sue or be sued, or enter into contracts in its own name.
2. Limited Partnership
A limited partnership is a type of partnership where there are two kinds of partners: general partners and limited partners. General partners have the same rights and responsibilities as in a general partnership, but limited partners have limited liability and limited involvement in the business. Limited partners are usually passive investors who contribute capital but do not participate in the management or decision-making of the business. They are entitled to receive a share of the profits according to their investment, but they cannot lose more than their initial contribution.
The main advantage of a limited partnership is that it allows the general partners to raise funds from outside investors without giving up control or ownership of the business. The limited partners also enjoy tax benefits, as they are taxed only on their share of the profits.
The main disadvantage of a limited partnership is that it requires more formalities and regulations than a general partnership. A limited partnership must be registered with the state and file annual reports and financial statements. The general partners also have unlimited liability for the debts and obligations of the business, while the limited partners have no say in how the business is run.
3. Limited Liability Partnership
A limited liability partnership (LLP) is a type of partnership where all partners have limited liability for the debts and obligations of the business. Unlike a limited partnership, an LLP does not have general partners or limited partners; instead, all partners are equal in terms of rights and responsibilities. An LLP combines some features of a corporation and a partnership, such as having a legal identity separate from its partners, being able to own property, sue or be sued, and enter into contracts in its own name.
The main advantage of an LLP is that it protects the partners from personal liability for the actions or errors of other partners or employees, as long as they are not involved in or aware of them. An LLP also offers flexibility in how the partners manage and operate the business, as they can decide on their own rules and procedures in a written agreement.
The main disadvantage of an LLP is that it is subject to more regulations and fees than a general partnership. An LLP must be registered with the state and comply with certain reporting and disclosure requirements. An LLP also has to pay taxes at both the entity level and the partner level, which may result in double taxation.
4. Limited Liability Company
A limited liability company (LLC) is not technically a type of partnership, but rather a hybrid business structure that combines some aspects of a corporation and a partnership. An LLC has one or more owners, called members, who have limited liability for the debts and obligations of the business. An LLC can be managed by its members or by one or more managers appointed by them. An LLC can choose how it wants to be taxed: as a sole proprietorship, a partnership, or a corporation.
The main advantage of an LLC is that it offers flexibility and simplicity in how it is formed and run. An LLC does not require any formal registration or paperwork, except for filing an articles of organization with the state. An LLC can also adopt any management structure and operating agreement that suits its needs.
The main disadvantage of an LLC is that it may not be recognized or treated consistently across different states or countries. An LLC may also face difficulties in raising capital from outside investors or lenders, as it does not issue shares or bonds like a corporation.
5. Joint Venture
A joint venture is a type of partnership where two or more parties agree to collaborate on a specific project or activity for a limited period of time. A joint venture can be structured as a separate legal entity, such as an LLC or an LLP, or as a contractual agreement, such as a memorandum of understanding or a letter of intent. A joint venture can involve parties from different industries, sectors, or countries, who bring their own resources, expertise, and goals to the partnership.
The main advantage of a joint venture is that it allows the parties to share the risks and rewards of a new venture, as well as to access new markets, technologies, or customers. A joint venture also enables the parties to maintain their independence and identity, as they do not merge or acquire each other.
The main disadvantage of a joint venture is that it may create conflicts or misunderstandings among the parties, especially if they have different cultures, values, or expectations. A joint venture also requires careful planning and coordination, as well as clear communication and trust among the parties.
6. Strategic Alliance
A strategic alliance is a type of partnership where two or more parties agree to cooperate on a long-term basis to achieve their mutual objectives. A strategic alliance can be formal or informal, exclusive or non-exclusive, and involve various levels of integration and commitment. A strategic alliance can cover various areas of cooperation, such as research and development, marketing and distribution, production and supply chain, or innovation and technology.
The main advantage of a strategic alliance is that it allows the parties to leverage their strengths and complement their weaknesses, as well as to create synergies and competitive advantages. A strategic alliance also fosters learning and innovation, as the parties exchange knowledge and ideas.
The main disadvantage of a strategic alliance is that it may entail high costs and risks, such as loss of control, opportunism, or dependency. A strategic alliance also requires constant monitoring and evaluation, as well as adaptation and alignment to changing circumstances.
7. Franchise
A franchise is a type of partnership where one party, called the franchisor, grants another party, called the franchisee, the right to use its name, logo, products, services, systems, and methods in exchange for a fee and a percentage of sales. A franchise can be product-based, service-based, or business-format. A product-based franchise involves the distribution of a specific product or brand by the franchisee. A service-based franchise involves the provision of a specific service by the franchisee. A business-format franchise involves the replication of a complete business model by the franchisee.
The main advantage of a franchise is that it offers a proven and successful formula for both the franchisor and the franchisee. The franchisor benefits from expanding its market presence and customer base without investing in new outlets or staff. The franchisee benefits from operating under an established brand name and reputation, as well as receiving training and support from the franchisor.
The main disadvantage of a franchise is that it limits the freedom and creativity of both the franchisor and the franchisee. The franchisor has to maintain quality and consistency across all its outlets and protect its intellectual property rights. The franchisee has to follow the rules and standards set by the franchisor and pay ongoing fees and royalties.
Types of Partnerships and Their Global Demand
Partnerships are a common way of doing business with other people. A partnership is a business with two or more owners who share the profits and losses of the business. There are different types of partnerships depending on the rights, responsibilities, and liabilities of the partners. Some partners may have more control over the business than others, and some may have more protection from legal claims than others.
According to a report by the World Bank, partnerships are one of the most popular forms of business organization in the world, especially in developing countries. The report states that partnerships account for 15% of all firms in low-income countries, 13% in lower-middle-income countries, 11% in upper-middle-income countries, and 9% in high-income countries. The report also suggests that partnerships tend to perform better than sole proprietorships in terms of sales, profits, and productivity. However, partnerships also face more challenges than corporations in terms of access to finance, taxation, and regulation.
Advantages and Disadvantages of Different Types of Partnerships
There are three main types of partnerships: general partnerships, limited partnerships, and limited liability partnerships. Each type has its own advantages and disadvantages for the partners and the business.
General partnerships are the simplest and most common type of partnership. In a general partnership, all partners share equal rights and responsibilities in the business and split profits equally. All partners also have unlimited liability for the debts and obligations of the business. This means that their personal assets can be used to pay off any legal claims against the business.
Limited partnerships are partnerships where one or more partners have limited liability and do not participate in the management of the business. These partners are called limited partners and they only risk losing their investment in the business. The other partners are called general partners and they have unlimited liability and full control over the business.
Limited liability partnerships are partnerships where all partners have limited liability and some degree of management rights. This type of partnership is often used by professionals such as lawyers, accountants, or doctors who want to reduce their personal risk while retaining some control over their business.
The advantages and disadvantages of each type of partnership depend on the goals, preferences, and circumstances of the partners. Some factors to consider are:
– How much control do you want to have over the business?
– How much risk are you willing to take for the business?
– How do you want to split profits and losses with your partners?
– How do you want to be taxed as a partner?
– How easy or difficult is it to form, run, or dissolve your partnership?
References:
https://sites.hks.harvard.edu/m-rcbg/CSRI/publications/workingpaper_23_zadek_radovich.pdf
http://www.fdi.gov.cn/pub/FDI_EN/Laws/GeneralLawsandRegulations/BasicLaws/P020061018643910006967.pdf
http://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf
https://www.upcounsel.com/types-of-partnerships
https://www.investopedia.com/terms/p/partnership.asp
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https://www.forbes.com/sites/allbusiness/2016/05/04/the-pros-and-cons-of-15-popular-types-of-business-partnerships/?sh=5c9a1f0c2f3d
https://www.sba.gov/business-guide/launch-your-business/choose-your-business-structure
