What are partnerships and limited liability companies?

Some business owners choose to create partnerships or limited liability companies instead of a corporation. A company may also be called a firm, and refers to a combination of a group of people working together in a business or professional practice.While companies have strict rules on how they are structured, partnerships and limited liability companies allow the division of management authority responsibility, profit sharing and ownership rights among the owners to be very flexible.Associations are divided into two categories. General partners are subject to unlimited liability. If a company can not pay its debts, creditors can demand payment of personal property of general partners. The partners have the authority and responsibility to manage the business. They are analogous to the President and other officers of a corporation.Sponsors escape the unlimited liability that the general partners have. They are not responsible as individuals, for the debts of the company. These are junior partners who have ownership rights over the profits of the company, but generally not involved in the senior management of the company. A partnership must have one or more general partners.A limited liability company (LLC) is becoming more common among small businesses. An LLC is like a corporation regarding limited liability and is a company with respect to flexibility in dividing the profit among the owners. Its advantage over other types of ownership is its flexibility in how profit and management authority are determined. This can have a downside. Owners must sign very detailed agreements about how the profits and management responsibilities are shared. It can be quite complicated and usually requires the services of a lawyer to draft the agreement.A partnership or LLC agreement specifies how profits will be divided among the owners. While the shareholders of a corporation receive a share of the profit that is directly related to the number of shares they hold, a partnership or LLC must not divide the profit depending on how much each partner invested. The capital is the factors used in the allocation and distribution of profits.