Partnerships have become an increasingly popular and effective way for businesses to collaborate and achieve mutual success.
By pooling resources, knowledge, and expertise, firms can tap into new markets, optimize operations, and leverage shared advantages.
However, not all partnerships are created equal. Understanding the different types of business partnerships is essential to make informed decisions and maximize the potential benefits.
In this article, we will delve into the various types of business partnerships and offer guidance on how to form the most suitable partnership for your business.
What is a partnership?
In essence, a partnership is a legal and financial association between two or more individuals or entities who agree to operate a business together.
Depending on their agreement, business partners may equally share profits, losses, and responsibilities in a company. Those involved in a partnership are categorized as either:
- General partners are the ones mainly responsible for managing all aspects of a company, from daily operations to its liabilities.
- Limited partners, meanwhile, have no daily involvement in the organization’s operations. Also known as silent partners, their only involvement lies in investing money in exchange for shares of a business.
Types of business partnerships
Business partnerships are composed of various types according to their protection of assets and responsibilities in a liability.
Below are the general types of business partnerships:
The general partnership is the most straightforward form of partnership. It does not require forming a business entity, only a formal agreement between multiple entities carrying out the business.
In a general partnership, all partners share equal responsibility for managing the business and bear equal liability for any debts or legal obligations incurred.
For instance, all involved partners will shoulder a business loan when one cannot repay it. A partner can also negotiate contracts with third parties on behalf of others.
This structure allows for shared decision-making, pooled resources, and flexibility in terms of profit distribution.
General partnerships can be easily dissolved in case of death or bankruptcy.
A limited partnership is a type of partnership entered by legal business entities authorized by the state. It consists of a general partner and several limited partners.
The general partners have direct control over the day-to-day operations of the business and bear unlimited liability.
Meanwhile, the special partners contribute capital but have limited involvement in the management of the company. They have no responsibility for liabilities and debts incurred by the general partners.
Limited partnerships are often utilized when one party provides expertise or specialized knowledge while another party provides capital.
Unlike a general partnership, a limited partnership does not dissolve easily with the death or bankruptcy of a special partner. They cannot also withdraw or reassign their share to another entity unless granted by the general partner.
Limited liability partnership
A limited liability partnership (LLP) is the combination of the advantages of a business partnership with the limited liability protection of a corporation.
Compared to a limited partnership, an LLP does not have a general partner.
Instead, all partners have limited liability for the actions of the other partners. This means that each partner is protected from personal liability for the partnership’s debts and obligations.
LLPs are particularly popular in professional service industries, such as law or accounting firms. This structure benefits professionals in terms of asset protection.
Limited liability limited partnership
A limited liability limited partnership (LLLP) is a relatively new form of partnership that combines elements of both limited partnerships and limited liability partnerships.
General partners in an LLLP have limited liability, similar to an LLP. On the other hand, limited partners contribute capital but have limited involvement in management, similar to a limited partnership.
LLLPs are commonly used when partners want to limit personal liability while maintaining some degree of control over the business.
Being a new type of business partnership, an LLLP is yet to be recognized in most locations, with only a few states acknowledging them.
Public-private partnerships (PPPs) are partnerships between a government entity and one or more private sector organizations. These partnerships are typically formed to finance, develop, and operate public infrastructure projects or provide public services.
Projects developed through public-private partnerships are distributed through the build-operate-transfer model. Large-scale infrastructures are passed on to the concerned public agency after building.
PPPs leverage the strengths of both the public and private sectors. This allows for the efficient delivery of quality services or infrastructure while sharing risks and rewards.
Advantages of partnerships
Partnerships offer various benefits that can contribute to the success and growth of a business. Some key advantages include:
- Shared resources and expertise. Partnerships allow businesses to pool their resources, knowledge, and networks. This allows them to access a wider range of resources and expertise when they need it.
- Risk sharing. By spreading the risks and responsibilities among partners, partnerships provide a safety net and reduce the burden on individual members.
- Increased financial capacity. Partnerships can combine financial resources to fund growth, investments, and new ventures that may have been challenging to pursue independently.
- Flexibility. Partnership agreements can be customized to meet the specific needs and objectives of the parties involved. This gives each partner involved more flexibility and adaptability as the business environment evolves.
- Synergy and innovation: Collaborative partnerships foster creativity, innovation, and the exchange of ideas. This leads to improved products, services, and operational efficiencies.
Disadvantages of partnerships
While partnerships offer compelling advantages, it is important to be aware of the potential drawbacks:
- Shared decision-making. Collaboration requires consensus, which can sometimes slow down the decision-making process and hinder agility.
- Shared profits. Partnerships involve sharing profits, which may result in a lower individual financial reward compared to operating as a sole proprietorship or corporation.
- Liability. General partners have unlimited liability in certain types of business partnerships. This means their personal assets can be at risk if the partnership incurs debts or legal liabilities.
- Dependency on partners. The success of a partnership is heavily dependent on the commitment, skills, and reliability of its partners. Conflicts or disagreements among partners can impact business operations and success.
- Less motivation. Partners who are not directly involved in the company’s operations may feel less personal motivation about its success.
How to form a business partnership
An organization can utilize these types of business partnerships with careful consideration and planning.
Here are the key steps to follow when forming a business partnership:
Ensure similar values
Before embarking on a partnership, it is crucial to ensure that all involved parties share similar values, goals, and visions for the business.
Misaligned values can lead to conflicts and hinder the partnership’s success.
Decide the type of business partnership to use
Review the different types of business partnerships discussed earlier and select the one that aligns with your specific requirements and objectives.
Apart from liability, decision-making authority, and profit sharing, legal recognition should be prioritized to make an informed decision.
Currently, four of the mentioned types are acknowledged, with the public-private partnership involving larger-scale projects. If you would prefer LLLPs, check with your state regulation first if they recognize this type.
Tackle financial management
Handling business finances is a must-tackle in business partnerships.
Most types of business partnerships listed mainly involve investors through limited partners. However, you should still run through major factors in the financial management of an organization, including the following:
- Partner contributions. Discuss the amount of shares each partner will pool in on the business.
- Debt and equity. Ask the majority of partners whether they are comfortable with the company taking business loans and how it will be managed.
- Cash flow management. For general partnerships, decide which partner will handle the organization’s cash flow and how the other partners can help.
Discuss partnership terms
Clearly define the terms of the partnership in a written agreement.
A properly-drafted business partnership agreement clearly spells out the company’s business structure under a partnership. This should include provisions regarding profit distribution, decision-making processes, roles, responsibilities, and dispute-resolution mechanisms.
With a partnership agreement, you get to outline your entire business partnership until its dissolution.
Prepare legalities for partnerships
Treat your business partnership like how you would build a corporation – through legalities and documentation processes.
Consult with a legal professional to ensure that all necessary legal formalities are adhered to when establishing your partnership. This may include registering the partnership with the appropriate government agencies and drafting a comprehensive partnership agreement.
Which business partnership is best for you?
The types of business partnerships above will not always fit every firm possible.
Determining the best business partnership for your specific circumstances requires careful consideration of various factors, including:
- The nature of your business
- Your goals
- Your risk appetite
Take into account your long-term objectives, desired level of involvement in management, liability considerations, and the availability of potential partners.
Business partnerships can be a powerful force in driving business growth and success. By understanding the different types of partnerships and weighing their advantages and disadvantages, organizations can harness the potential of collaboration.
Choose the partnership structure that best aligns with your goals, and embark on a journey of shared achievements and shared rewards.