A partnership is formed when two or more people co-own a business and share in its earnings and losses. Each person in a partnership adds something to the business. This can be in the form of ideas, money, property, or a combination of these. Management rights, profit sharing, and personal liability will all be different. The type of partnership the company chooses will determine these criteria. Here, we’ll discuss some of the types of partnerships in Nigeria.
Types of Partnerships
#1. General Partnerships
A general partnership is made up of two or more proprietors who work together to achieve a common goal. General partners have equal rights in the management of the business. They are also equally responsible. Any individual partner can legally bind the entire group.
Each individual partner is fully responsible for all of the company’s debts and responsibilities. This is commonly referred to as unlimited liability. This means that a company’s personal assets might be utilized to pay off its debts. Personal accountability can be intimidating, but it comes with a tax benefit.
Profits from a partnership are not taxed to the business, but instead pass through to the partners. This includes gains on their lower-rate individual tax filings. Each partner files a personal income tax return, and they are not taxed twice.
This form of business structure is simple to establish. The secretary of state does not require you to file an article of incorporation. To begin, choose a business name, obtain a business license (if required), and open a bank account for your company.
#2. Limited Partnerships
A limited partnership is a collaboration between two types of business owners. A general partner and a limited partner are two of these sorts. General partners run the company and have unlimited liability. Limited partners invest money but have little influence.
A limited partnership allows each member to limit their responsibility based on their original business investment. This constraint does not benefit every partner. There must be at least one participant to accept a general partnership status. This exposes them to full personal accountability for the debts and obligations of the firm. The general partner retains control of the company. The limited partner(s) have no say in managerial choices. Profits are shared by both general and limited partners.
Because the Internal Revenue Service (IRS) considers limited partnerships to be separate entities, they have their own tax status. Individual partners are subject to business taxes. There is no such thing as double taxes. This is a common business model for professional services and startups.
#3. Limited Liability Partnerships
Limited liability partnerships (LLPs) are similar to limited partnerships in that all partners have some liability protection. LLPs retain the tax advantages of general partnerships. At the same time, they provide participants with some personal responsibility protection. An LLP provides business owners with debt protection. They are still held accountable for their acts.
Individual partners in an LLP are not personally liable for the wrongdoings of their colleagues. They are also not liable for the company’s debts or responsibilities. This is a popular option for professional services such as lawyers or doctors.
The LLP structure modifies some fundamental aspects of the traditional partnership. As a result, several state tax authorities apply non-partnership tax laws to LLPs. The IRS considers these businesses to be partnerships. They permit partners to use the pass-through taxation method. LLP partners declare their earnings on their personal tax returns. This avoids the problem of double taxes.
Existing partnerships that want to convert to LLP status do not need to amend their partnership agreement, but they can if they want to. To alter status, a partnership simply files an application with the relevant state office for registration as an LLP.
The name and major location of the business of the partnership must be disclosed in all states. Some governments also require, among other things, the number of partners to be identified. They may require a brief description of the business as well as assurances that the partnership will retain insurance. They may also request formal confirmation that the limited liability status is about to expire.
Types of Partnerships On the Basis of Time
#1. Partnership at Will
In general, the partnership deed includes a provision for the expiration or dissolution of a partnership firm. A partnership at will, on the other hand, is one in which the said clause does not exist. As the name suggests, the outcomes of the parties involved determine its fate. It can operate for as long as the partners wish it to and can be terminated at any time if any of the partners deliver a termination notice. Partnership at will has two conditions: (i) there should be no particular date on the agreement, and (ii) the agreement should not contain any information regarding the termination of the partnership. This sort of partnership is appropriate for enterprises when the partners have no certainty or concept of when the relationship will end, as well as for firms whose nature is non-deferring or permanent.
It is simple for the partners to form a partnership at will because there is no bother in its formation, and it is also comfortable for the partners because the partnership has no length. Furthermore, the partners can easily and swiftly dissolve the partnership if any of the partners serve notice of termination. This benefit of partnership at will might be a significant disadvantage for the partners at times. It is because if a partner issues a notice of termination, the other partners are unable to continue the firm. Furthermore, under Partnership at Will, the partners have limitless liability, which means that any embezzlement or ethical violation by any of the partners will be held accountable.
#2. Fixed-term partnership
A partnership for a definite duration is one that is created for a specific amount of time. Unless otherwise stated in the contract, the partnership terminates on the date provided in the partnership deed. If the business continues after the expiration date, the partnership is regarded as a partnership at will, with all of the partners’ rights, duties, and obligations treated as such. This sort of partnership is appropriate for firms where the partners have a clear understanding of the nature of the business and its duration.
It has an advantage over a partnership at will because its dissolution is a unanimous decision rather than a one-sided one. Furthermore, establishing a fixed-term partnership provides some security and direction to the business as opposed to a partnership at will, which is dependent on the will of the partners involved. However, there is the possibility of disagreement regarding the term or time period of the partnership. Some partners may prefer a short relationship time, while others prefer a long partnership term. Furthermore, partners’ limitless liability may place a significant strain on them.
#3. Particular Partnership
A specific partnership is one that is formed specifically for the purpose of carrying out a single business venture or finishing a single project. In other words, this type of partnership is formed to conduct ongoing business or to carry out a one-of-a-kind project or operation. It is appropriate for partnerships in which the participants agree to dissolve the business together and split the profits or losses.
In contrast to Partnership at Will, all partners agree to dissolve the partnership, so it is not a unilateral decision. The longevity of the business determines the duration of the partnership. As a result, under this sort of partnership, the partners’ will is irrelevant. The unrestricted liability of partners, similar to partnership for a fixed term, places a significant load on them.
Choosing the Best Business Partnership
Here are some helpful hints to help you select the best business partnership for you:
#1. Determine your vision and objectives.
Your overall vision and goals are critical in establishing the type of company relationship that is best for you. A general partnership, for example, is not a good choice if you do not wish to manage the company’s day-to-day operations. It might be a good idea to choose an LP or LLP when you are not required to manage or administer the business. To identify your vision and goals, answer the following questions:
- What do you hope to add to the company?
- What do you want to gain from the collaboration?
- Are you seeking for a tax break, a steady source of income, or the opportunity to follow a dream career?
- What kind of role do you wish to play in the company?
- How do you want to handle money structuring and partnership accounting?
#2. Establish your professional practice.
Different types of business partnerships are appropriate for various types of businesses, industries, markets, and sectors. To choose the right business partnership, you must first decide what type of firm you want to start and what industry it will operate in. General partnerships, for example, are great for anyone who wishes to start a business with a family member, friend, or business partner, such as owning an agency or restaurant. LLPs are widespread in certain professions such as accountancy, law, taxation, architecture, and medicine.
#3. Examine the advantages and disadvantages.
Every business relationship has advantages and disadvantages that must be considered when making a decision. For example, while general partnerships are simple to join and dissolve, they are not stable, and individual members are personally accountable for any debts incurred by the business. Limited partnerships are more solid than general partnerships, although only general partners are liable for the company’s legal obligations and debts. LLPs have various advantages, including the fact that partners are not liable for the actions of other partners, but they also have restrictions, such as responsibility extending to partners’ personal assets.
#4. Establish county laws and regulations.
Business partnerships include a number of legal and financial duties that parties must follow in order to remain compliant. For example, all partnerships must register with HM Revenue and Customs, or HMRC, and limited partnerships must additionally register with Companies House. Do your homework to find out what the legal responsibilities are for each sort of business partnership in your area. Use this data to determine which laws and regulations you can readily comply with during the course of your cooperation. Investigate permitted partnerships in your area to determine the types of business partnerships available to you.
#5. Seek legal counsel.
Consult with an attorney or tax advisor before deciding on the sort of partnership that best fits your company’s vision and goals. They are familiar with and understand the many types of business structures and will advise you accordingly. Because they are tax law professionals, they can help you understand what is expected of you as a general or limited partner. Attorneys answer all of your inquiries, handle your concerns, and assist you in minimizing the hazards of business partnerships.
What is The Most Common Type of Partnership?
Limited partnerships (LP) and limited liability partnerships (LLP) are the two most prevalent types of partnerships. Only one general partner has unlimited liability in a limited partnership, whereas all other partners have limited liability.
What is the Least Common Type Of Partnership?
The general partnership is the least prevalent type of partnership. Neglect is a major contributor to small business failure. Corporations enjoy major tax advantages over single proprietorships or partnerships.
What are the Two Types Of Partners In A Limited Partnership?
There are two categories of partners in a limited partnership: general partners and limited partners. It must have at least one of each type. All partners—limited and general—share in the business’s profits. Each general partner bears limitless liability for the company’s commitments.
What are The Three Ways In Which A Partnership Can Be Dissolved?
Dissolution can be caused by one of three factors: (1) by the partners’ act—some dissociations do result in dissolution; (2) by operation of law; or (3) by court order
What is LLP in Nigeria?
A limited liability partnership is a type of company arrangement that protects business partners from personal liability. Professional businesses like law firms, accounting firms, or medical offices frequently form LLPs.
Beginning a business is thrilling, but it is critical to get it right from the start. There is a lot to think about, from picking your legal structure to comprehending your tax-exempt status. With so many different forms of business structures and corporations, always seek professional advice before making any decisions.
Speak with an experienced attorney if you want to understand more about the many sorts of partnerships. An attorney can guide you through the maze of corporate entities. They can assist you with business creation for your new venture. This can help safeguard your company from future problems.
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