How to Choose the Right Type of Business Partnership?
Selecting the right business structure is one of the most important decisions any entrepreneur takes. Your corporate structure not only determines the day to day functioning of your business but the right structure also enables the future growth of your company. Your business arrangement also determines the taxation laws applicable to your company and the legal liabilities involved in its establishment and operation.
To select the right partnership, you need to be aware of the different types of partnership firms that are possible and the validities associated with each of them. Your corporate counsel can help you in opting and establishing the structure that is ideally suited for your business model.
Here are a few tips that help you select the right type of partnership for your business:
Types of Partnerships Firms
There are majorly three types of partnership firms. Most collaborative businesses follow one or a hybrid of these three structures.
- General Partnership (GP) - A general partnership is an entity owned by two or more individuals who share equal liability and profits in the business.
- Limited Partnership (LP) - In a limited partnership, a single person has the control of the operations and other partners invest and share the profits.
- Limited Liability Partnership (LLP) - this structure is a hybrid of general and limited partnerships where the partners are deemed as a separate entity from the business and share limited liabilities and returns.
To choose the right type of partnership for your business, you need to be aware of the legal regulations associated with each of the enterprises. The Partnership Act is the legislation that regulates the establishment and functioning of partnerships in Alberta.
When it comes to managing business liabilities, limited partnerships make more sense. As in the case of limited or limited liability partnerships, the business is treated as a distinct unit from the partners. Therefore in LLPs, a partner’s personal assets cannot be used to settle business debts and liabilities. Although in LPs and LLPs, the general partner has the majority of control over the business’s operations and receives profits prior to the limited partners. The limited partners more often than not are treated as silent investors.
When it comes to considering tax implications, general, limited and limited liability partnerships are taxed exactly alike. The load of taxation is shared equally among the partners depending on their investment in the company.
Expense of Formation/Restructuring
When it comes to the simplicity of establishing or restructuring your business according to a certain collaboration, a general partnership is the easiest. GPs don’t require extensive paperwork in the form of payment of a formation filing fee, province fees or taxation for the franchise.
LPs and LLPs require extensive filing and record-keeping as the business is a separate entity than the partners. Widespread book-keeping makes sure limited partners are held liable in case of unethical or irresponsible conduct. LPs and LLPs also need to conduct regular meetings with their partners to share the company portfolio and issue partnership interests.
Keep these points in mind while selecting the ideal business model for your company. And always consult a corporate lawyer to draft a partnership agreement which makes sure the collaboration suits the requirements of your business and doesn’t result in litigation at a later stage.