When starting a new business project, you must determine what type of business you are forming. If you plan to own and operate your business with another person, you will generally form a partnership.
Not all partnerships are the same. There are three different types of partnership: general, limited and limited liability. Understanding the differences between them is essential.
General partnership
Every partnership includes at least one general partner. These are the individuals who own the business and are responsible for all of the decisions, expenses and liabilities associated with the business.
General partnership is a type of self-employment. Income from the business goes to the partners, who report it on their personal tax returns and pay federal self-employment taxes. All partnerships earning income in New Jersey must also file form NJ-1065.
Limited partnership
Some business formations include limited partners who invest in the business. These partners have limited liability. They also have no say in the operations of the business. The general partners make all of the decisions.
Limited partners earn income on their investment, which is not self-employment income. However, they do need to pay self-employment tax if they perform any services for the business.
Limited liability partnership
A limited liability partnership is similar to a general partnership, but there is an important difference. In an LLP, all general partners have limited liability, so they do not risk losing personal assets if someone sues the business. Partners in an LLP are still personally liable for their own actions.
Understanding the different types of partnerships can help set you up for success in your new business venture.
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