There are two types of partnerships – a general partnership & limited liability partnership.
General partnerships consist of two or more partners who are both responsible for the business. They share the assets and profits, as well as the liabilities and management responsibilities for running the business.
Each of the individual general partners is taxed on his or her personal income tax return, which means they must include the business’ income on their income tax returns. Each partner can also deduct losses from the business on his or her own individual tax return. This pass-through tax treatment is one of the most beneficial advantages of forming a partnership. With pass-through tax treatment, filing is relatively easy. There is no taxation to the business itself; all income, deductions, and credits, “pass through” to the individual partners and are reported on their individual tax returns.
Limited Liability Partnership (LLP)
For the business owners who do not want to assume any liability , there are limited liability partnerships (LLPs). An LLP allows limited liability for all of the partners. Like general and limited partnerships, LLPs pass the profits and losses through to the partners, and LLPs have the flexibility of choosing either a centralized management structure or a completely decentralized structure like a general partnership. Unlike a general partnership, partners in an LLP have limited liability and, unlike limited partners in a limited partnership, they do not lose their limited liability if they actively participate in management.
The main advantage of a Limited Liability Partnership over a traditional partnership firm is that in a LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. A LLP also provides limited liability protection for the owners from the debts of the LLP.
Partnership agreement is most important document. The governance of LLP is based on LLP agreement. Hence everything should be stated clearly in the LLP agreement.