What Are Partnerships And Limited Liability Companies?

Some business owners choose to create partnerships or limited liability companies instead of a corporation. A joint venture can also be called a company and is a group of people working together in a business or professional practice.

There are strict rules on how corporations are structured, and partnerships and limited liability companies allow for greater flexibility in managing authority, sharing profits and distributing ownership among owners.

The partnership falls into two parts. Normal partners are subject to unlimited liability. If a business is unable to pay its debts, its creditors can request payment from the personal assets of the general partners. Ordinary partners have the power and responsibility to manage the business. They are like the president and other officials of a corporation.

Limited partners escape the unlimited responsibilities of ordinary partners. They are not responsible for the responsibilities of the partnership as individuals. They are junior partners who own ownership rights in the profits of the business, but do not usually participate in the top management of the business. A joint venture should have one or more ordinary partners.

Limited Liability Company (LLC) is becoming more and more popular among small businesses. The LLC is similar to a limited liability corporation, which is a partnership with the owners of the flexibility of splitting profits. Its advantage over other types of ownership is its flexibility in determining profitability and management authority. This can be a disadvantage. Owners must enter into very detailed agreements on how profit and management responsibilities are divided. It can be very complicated and usually requires the services of a lawyer.

A partnership or LLC agreement specifies how the profits are divided among the owners. Shareholders of a corporation receive a share of the profit directly related to the number of shares they have, but the profit should not be divided by how much each partner invests in a joint venture or an LLC. Investment capital is the only factor used to allocate and distribute profits.