Although partnerships enjoy relatively flexible management attributes, partnerships lack the broad limitations of liability featured in limited liability companies and corporations. For this reason, the relative popularity of partnerships has waned over time.
There are several types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships.
A general partnership is formed when two or more persons or businesses associate to operate a business for profit. General partners have fiduciary duties of loyalty and care to one another. Usually, the partnership is governed by a partnership agreement, which is a private contract between the partners about how the entity will be governed. Management is not centralized, but rather by the majority vote of partners, unless otherwise provided in the partnership agreement. In general partnerships, the liabilities of the partnership flow through to the partners.
The limited partnership is similar to the general partnership, except that there will be one or more limited partners who contribute cash, property or services to the partnership. Limited partners do not participate in the management of the partnership, however. Liabilities of the partnership still flow through to the general partner, but the limited partners generally are at risk only to the extent of their investment in or contribution to the partnership.
A partnership may choose to register as a limited liability partnership. In this form, the partners remain liable for their own actions – but not those of the other partners. Also, a limited liability partner may participate in the management of the partnership without losing its limited liability status.
Partnerships can be useful in joint ventures for a specified period of time, or until a certain objective is reached – particularly among business entities such as corporations or LLCs, which have liability protections built in to their organizational structure. In these cases, partnerships can provide a business stricture that is relatively easy to set up and cost-effective to administer.