What are partnerships and limited liability companies?

What are partnerships and limited liabilitycompanies?Some business owners choose to createpartnerships or limited liability companiesinstead of a corporation. A partnership can alsobe called a firm, and refers to an association ofa group of individuals working together in abusiness or professional practice.While corporations have rigid rules about howthey are structured, partnerships and limitedliability companies allow the division ofmanagement authority, profit sharing and

ownership rights among the owners to be veryflexible.Partnerships fall into two categories. Generalpartners are subject to unlimited liability. Ifa business can't pay its debts, its creditors candemand payment from the general partners'personal assets. General partners have theauthority and responsibility to manage thebusiness. They're analogous to the presidentand other officers of a corporation.Limited partners escape the unlimited liabilitythat the general partners have. They are notresponsible as individuals, for the liabilitiesof the partnership. These are junior partners whohave ownership rights to the profits of thebusiness, but they don't generally participate inthe high-level management of the business. Apartnership must have one or more generalpartners.

A limited liability company (LLC) is becomingmore prevalent among smaller businesses. An LLCis like a corporation regarding limited liabilityand it's like a partnership regarding theflexibility of dividing profit among the owners.Its advantage over other types of ownership is itsflexibility in how profit and managementauthority are determined. This can have adownside. The owners must enter into verydetailed agreements about how the profits andmanagement responsibilities are divided. It canget very complicated and generally requires theservices of a lawyer to draw up the agreement.A partnership or LLC agreement specifies howprofits will be divided among the owners. Whilestockholders of a corporation receive a share ofprofit that's directly related to how many sharesthey own, a partnership or LLC does not have todivide profit according to how much each partnerinvested. Invested capital is only of the factorsthat are used in allocating and distributing

profits.