A:

A partnership is a business agreement between two or more people who are called partners. Each partner owns a share of the business personally. This is a less expensive business structure and is more customizable than a corporation. The attractive attribute of a partnership is that profits and losses are passed on directly to the partners, thereby avoiding double-taxation that is incurred through a corporation. There are three types of partnership structures: general partnerships, limited liability partnerships and limited partnerships. Each has unique characteristics, benefits and risks.

A general partnership is an agreement between two or more people who share equally in profits and liabilities for the company. This can be as informal as a verbal agreement made over coffee or a formalized contractual agreement between partners. There are no requirements for business structure or governance; it is entirely up to the partners to define how the company is to be run and who runs it. Each general partner receives profits and losses as personal income on a Schedule K-1 and the company itself is not taxed on earnings. Corporations are subject to tax on earnings that are then passed on to the owners, who pay tax on the same earnings on their personal income tax returns. Avoiding this double-taxation is a key advantage to owning a partnership. General partners are also responsible for the company's solvency and liabilities, making this arrangement very risky. Unlimited liability rests on each general partner, even if one partner is solely responsible for any illegal activities or financial problems. Further increasing the risk for general partners is the fact that each general partner can act independently on behalf of the company without consent from the other partners.

Limited liability partnerships offer the same tax advantages as a general partnership but offer some protection for partners' personal assets by limiting their liability to that of their interest in the company only. All partners are allowed to manage the business like in a general partnership; however, a formal agreement is required for this business type. This structure keeps all partners from subjecting their personal assets to the business liabilities. For example, Jim and Bob are attorneys and set up a limited liability partnership to share in each others' success. Their firm is sued by a former client, but neither Jim nor Bob have personal assets at risk.

Though they share similar names, a limited liability partnership and a limited partnership are quite different. A limited partnership differs by requiring at least one general partner to manage and take on all risk, while passive limited partners enjoy no liability. For investment purposes, a limited partner is a prudent position in a partnership because only the partnership interest is subject to liability.

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