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Understanding General vs. Limited Partnerships in SMEs

A business partnership is one of the common business structures where two or more individuals or corporations become the owners of a company. There are many types of business partnerships. These include General Partnerships (GPs), Limited Partnerships (LPs), Limited Liability Partnerships (LLPs), Limited Liability Limited Partnerships (LLLPs), and Joint Ventures.

Suppose you’re planning to venture into a Small and Medium-sized Enterprise (SME) business. In that case, the most common types of partnerships are General Partnerships (GPs) and Limited Partnerships (LPs), which have similarities and differences. In this article, we’ll discuss more about GPs and LPs, and why they’re recommended for SMEs.

General Partnership

A general partnership is when two or more individuals manage a business together. It’s ideal for SMEs, especially since it offers a simple and flexible structure. Additionally, it’s the reason why it’s known for being the simplest form of partnership.

1. Equal Responsibilities

The general partnership allows each owner to act on behalf of the others. They have equal levels of rights in managing the business. However, given equal rights, all owners are also liable to legal liabilities, debts, and obligations. So, if one is financially at risk, so are the others.

Meanwhile, if all partners agree to divide the tasks as they see fit, they can do so as long as everyone agrees. However, due to the equality in management, it’s ideal to pick the best people to work with. If you doubt someone’s ability to manage your business, you should think it through before partnering with them.

2. Shared Profits and Losses

Aside from the managing abilities and other liabilities, the profits and losses of the business are also shared. This is why availing of SME business insurance is recommended. If your business has insurance, it can limit your losses especially since you’re prone to lawsuits and debts.

And since every partner has the right to the business, if they’re being sued, they can use the business’ profits to pay for their liabilities. Although the default is the equal share of profits, it can still affect your business if a partner pulls out their share, especially if it’s half.

Meanwhile, if you avail of SME business insurance, it may cover some of the finances of the lawsuits and can become a way to continue the business operation.

partnerships

3. Tax Treatment

General partnerships have pass-through taxation, which means that the tax isn’t included on the entity level, but rather on the individual or personal tax income of each partner. This means each partner isn’t required to file for business taxes, but they should report their profits and losses on their personal tax returns.

4. Ease of Formation

A general partnership is the simplest form of partnership because it doesn’t require a formal or legal way of filing the partnership. In most areas, if two or more individuals agree to work under the same business name, they’re automatically considered partners.

However, although this is the case, hiring a legal consultant to draft a legal document stating the partnership is recommended. This is for personal use only since it’s not one of the requirements needed to start an SME business.

Limited Partnership

A limited partnership consists of two or more partners where at least one is a general partner (has all-access management rights), and one or more limited partners. A limited partner doesn’t have the same level of rights as the general partner.

1. Limited Liability

In a general partnership, each partner has unlimited liability. On the other hand, a limited partner has less liability. There are some aspects of the business where limited partners are restricted. Usually, since the amount of investment allowed for a limited partner isn’t the same as the general partner, the same goes for their liabilities and losses.

Fortunately, when a limited partner becomes involved in lawsuits, it may not significantly affect the business, especially if you have SME business insurance. Aside from covering the losses, you won’t have to pause the business operations.

2. Management Structure

When it comes to the management structure, the general partner is responsible for everything the management does. On the other hand, limited partners contribute to the capital of the business, but don’t have the power to manage the daily operations.

Besides, a limited partner is also known as a silent partner, so their responsibility is mainly about the financial aspect.

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3. Pass-through Taxation

Similar to general partnerships, limited partnerships have pass-through taxation. It’s when each partner doesn’t need to file for business taxation. Instead, the general partner can file self-employment taxation, while the limited partners file taxes based on the income they receive from the SME business.

4. Capital Investment

Limited partners cover the capital of the partnership, while the general partner provides the capital and management skills. For instance, even if you don’t have any management experience or knowledge, as long as you have the knack for a good investment opportunity, you can be a limited partner.

Final Thoughts

Understanding the differences and similarities between general and limited partnerships is essential. It allows you to make an informed decision about the type of partnership you fit in. Since both are simple types of partnerships, they both fit in the SME business industry. However, it still depends on the personal abilities of the partners if they can effectively manage as a group or as an individual.

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