What Is a Partnership?

What Is a Partnership?

Let me explain what a partnership really is. It's a formal setup where two or more people come together to run a business and split its profits and debts.

You'll find different kinds of partnerships out there. In a general one, everyone shares the profits and liabilities equally. But in others, you might see uneven profit splits or some partners with limited liability. Sometimes there's even a silent partner who stays out of daily operations.

When you're picking a partnership type, think about how you want to handle daily management, who's okay with financial risks, and how taxes will work for you.

Key Takeaways

Remember, a partnership means two or more folks overseeing business and sharing profits and liabilities. In general partnerships, all share equally in both. Other setups might let some partners take less profit but avoid liability. Professionals like doctors and lawyers often go for limited liability partnerships. And yes, there can be tax perks over forming a corporation.

Types of Partnerships

Broadly speaking, a partnership can be any joint effort by various parties, like governments or nonprofits, with all sorts of goals. But when we're talking for-profit businesses with individuals, there are three main types: general, limited, and limited liability partnerships.

General Partnership

In a general partnership, all involved share legal and financial liability the same way. You're personally on the hook for the partnership's debts, and profits get split equally. Make sure you get the profit-sharing details in a written agreement.

One thing I recommend: include an expulsion clause in that agreement, spelling out what could get a partner kicked out.

Limited Liability Partnership

Limited liability partnerships, or LLPs, are popular among professionals like accountants, lawyers, and architects. They limit your personal liability, so if one partner gets sued for malpractice, your assets stay safe. Some firms distinguish between equity partners who own a stake and salaried ones who get bonuses but no ownership.

Limited Partnership

Limited partnerships mix elements of general and limited liability ones. There's at least one general partner with full liability for debts, and at least one limited or silent partner whose risk is capped at their investment. That silent partner usually doesn't handle daily management.

There's also a limited liability limited partnership, which gives even more liability protection to general partners, but it's not common.

Taxes and Partnerships

No federal law defines partnerships, but the IRS has rules in the Internal Revenue Code for how they're taxed. Partnerships are pass-through entities, so the business itself doesn't pay income tax—the responsibility goes to you as individual partners, and you're not treated as employees for taxes.

You might get better tax treatment in a partnership than in a corporation, since corporate profits and dividends get taxed twice, but partnership profits avoid that double hit.

Advantages and Disadvantages of Partnerships

Every business structure has ups and downs, and partnerships are no exception. Most solo owners can't handle everything alone, especially at startup, so partnering up lets you pool resources and skills for better launch odds.

It also eases daily operations by sharing the load, bringing in different expertise and fresh ideas to grow the business. But watch out: you share not just profits but also losses and debts from other partners. Conflicts or mismanagement can arise, and exiting or selling might be tricky to agree on.

Partnerships by Country

You see basic partnership types in places like the US, UK, and Commonwealth countries, but laws vary by jurisdiction. The US lacks a federal definition, but most states (except Louisiana) follow the Uniform Partnership Act, treating partnerships as separate from partners—unlike older views.

That Act covers general and LLPs but not limited partnerships. In places like England, partnerships aren't seen as independent legal entities.

How Does a Partnership Differ From Other Forms of Business Organization?

A partnership differs because it involves two or more people agreeing on ownership, duties, profits, and losses, with personal liability for business debts—unlike LLCs or corporations where owners are protected. So choose partners carefully, as creditors can target your personal assets.

If Partners Don't Have Limited Liability Why Set Up a Partnership?

Even without limited liability, partnerships are easier to start than LLCs or corporations, skipping formal government incorporation and heavy regulations. They're also more tax-friendly in many cases.

What Is a Limited Partnership vs. a Limited Liability Partnership?

In a limited partnership (LP), general partners run things with full liability, while limited partners stay out and have capped liability. An LLP differs by not fully exempting partners from partnership debts but protecting against other partners' actions. A limited liability limited partnership blends both.

Do Partnerships Pay Taxes?

No, the partnership doesn't pay business taxes itself; taxes pass through to you as partners on your personal returns, often using a Schedule K.

What Types of Businesses Are Best-Suited for Partnerships?

Partnerships suit groups of professionals in fields like medicine, law, accounting, consulting, finance, investing, and architecture, where each actively runs the business.

The Bottom Line

In the end, a partnership lets two or more people share business ownership, work, profits, and potential losses, often with better taxes than corporations. It can boost success through collaboration, but poor planning leads to mismanagement and disputes.