What are partnerships? How do they benefit people? What are the different types of partnerships? These are just a few questions that one would ask to look at the topic of partnerships. In this article we will try to answer them and also look at how the concept of partnership has evolved and developed over the years.
First of all, we will look at the basic definition of a partnership. A partnership is a legal relationship in which two or more parties, called partners in a venture, agree to collaborate on, or perform certain functions or objectives to further their joint interests. In most cases, the partners in a successful partnership can be people, private companies, public interest-oriented organizations, communities or combinations. This is not the same with all types of partnerships; some partnerships are strictly individuals with private interest, while others may be public or for-profit businesses.
There are basically two types of partnerships: sole proprietorships and limited liability partnerships (LLPs). A sole proprietor is a single individual who owns a business, sole proprietorships have limited liability; an LLP is a limited liability company (LLC). When we talk about partnerships, they can be either direct or indirect, i.e. they can be self-directing or indirect. An indirect partnership normally functions through one or more intermediaries; for instance, a builder company can act as the agent for building the partnership’s residential projects through a third-party builder. There are different types of partnerships: general partnerships, limited partnership, limited liability partnership (LLP) and indemnity partnerships.
Limited partnership: Limited partnerships are businesses in which both partners participate. All the partners receive the same share of the assets and liabilities of the partnership. A general partnership states that the partners share in the profits of the partnership but, in reality, do not receive any proportional share in the income or liability. This type of partnership does not qualify for pass-through taxation. However, for capital gains tax and inheritance taxes, the partners must pay themselves only the difference between the actual cost of the partnership and their share of the profits.
Limited liability partnership: Also referred to as a ‘limited liability’ partnership’, a limited liability partnership is a business entity that has one or more primary partners and one or more additional partners. Partnerships are classified into two – one partner and two partner partnerships. The one partner partnership is a simple partnership where the only partner is the person who has created the partnership. In this kind of partnership, the partners share in the liability and the profit; for the other partners, the partnership represents a sale of the partnership interest.
Immediate tax relief is provided to small business owners by passing through several levels of taxation. Partnerships are taxed as individuals when they receive their personal income. However, they are taxed as partners when they receive their share of the partnership income. The personal income tax is credited to the partners immediately after their share of the profit is received.