Partnership

A Partnership is a business structure where two or more people share ownership, responsibilities, and profits. Each partner contributes something to the business—like money, skills, or time—and shares in its profits, losses, and risks. There are different types of partnerships, each with varying responsibility, liability, and legal requirements.

A partnership is straightforward to set up and offers pass-through taxation, making it a cost-effective and tax-friendly business structure option. While partnerships come with shared decision-making and, in many cases, shared liabilities, they can be highly effective with good communication and a solid partnership agreement. This structure can work well for businesses wanting a straightforward, flexible setup that allows them to split work and share rewards effectively.

• Members: Partnerships are businesses owned by two or more people. They require an explicit partnership agreement to outline roles and responsibilities.
• Shared Amongst Partners: Partners share profits, losses, responsibilities, and liabilities.
• Types: General Partnership, Limited Partnership (LP), and Limited Liability Partnership (LLP) are common types of partnerships. States may even have further distinctions or variations, like a limited liability limited partnership (LLLP).

A partnership is a business structure formed when two or more individuals start a business together, pooling their resources, skills, and time. Partnerships are often chosen by professionals like law firms, medical practices, and small businesses looking to combine talents or share capital. Partners can contribute in various ways—through financial investment, expertise, or active management—and they share the profits and responsibilities of the business.

Unlike corporations or LLCs, partnerships typically don't require extensive legal formation documents. However, partners usually draft a partnership agreement to define each partner's rules, ownership, and responsibilities. This document helps establish terms for profit-sharing, contributions, roles, and what happens if a partner wants to leave or the partnership dissolves.

Common Types of Partnerships

1. General Partnership (GP):
   • In a General Partnership, partners share equal responsibility for managing the business, and each partner has unlimited liability for the partnership's debts and obligations.
   • All partners share profits and losses and may have equal voting rights, depending on the partnership agreement.
   • General partnerships are easy to form, usually don't need to be registered with the state, and often require only a verbal agreement, though having a written agreement is highly recommended.
2. Limited Partnership (LP):
   • An LP consists of one or more general partners (with unlimited liability and management responsibilities) and one or more limited partners (who invest money but don't actively manage the business).
   • Limited partners have liability only up to the amount they invested, making this structure attractive for those who want to invest without taking on operational responsibilities.
   • Limited partnerships are often used in real estate or investment projects where passive investors want to contribute financially without direct management.
3. Limited Liability Partnership (LLP):
   • In an LLP, all partners have limited liability, protecting them from personal responsibility for business debts and liabilities.
   • LLPs are popular with professional services firms, such as accounting or law practices, where partners want to limit their liability exposure.
   • In an LLP, each partner has more control over their individual liability, which is helpful in professions with high malpractice risk.

Review our Startup Cost tool to determine the requirements for starting each of the partnerships in your state.

Why Choose a Partnership?

A partnership can be a great option when looking to start a business with another person or group and wanting to share both the rewards and risks. Partnerships can offer:

1. Shared Resources & Responsibility: Each partner brings unique strengths, expertise, and resources, making it easier to grow the business. Partners can distribute tasks according to their skills, making operations more manageable.
2. Simple & Cost-Effective: Partnerships generally require less paperwork and fewer legal steps to form than corporations.
3. Flexibility: Partnerships have fewer formalities and allow partners to choose how they share responsibilities, profits, and decision-making powers.
4. Pass-Through Taxation: Like sole proprietorships, partnerships avoid corporate tax and allow profits to pass directly to partners' tax returns, avoiding double taxation.
5. More Access to Capital: Raising money or capital investment can be easier with multiple partners.

How to Form a Partnership

1. Draft a Partnership Agreement: This document outlines each partner's roles, profit-sharing, contributions, and responsibilities. It also details what happens if a partner leaves or the business dissolves.
2. Register the Partnership (If Required): Some states or industries require registration, especially if the partnership operates under a DBA (Doing Business As) or trade name.
3. Get an EIN (Employer Identification Number): If your partnership has employees, you'll need an EIN for tax purposes.
4. Open a Business Bank Account: Keeping a separate bank account helps manage finances and keeps personal and business funds separate.

Disadvantages of Partnerships

• Unlimited Liability in General Partnerships: Partners are personally liable for the obligations of the business.
• Potential for Disagreements: Differing opinions can lead to disputes, which may disrupt business operations if not managed well (think every legal show you've watched on CBS).
• Shared Profits: Partners must split profits based on the partnership agreement, which may only sometimes feel equitable, especially if one partner is working more than others.
• Less Control: Decisions are made jointly, which can slow down the process if partners have differing views.

What Are a Partner's Responsibilities?

The specific responsibilities depend on the partnership agreement, but they generally include:

1. Contributing Capital: Partners typically invest funds or assets in the business.
2. Management: Partners may manage day-to-day operations, depending on their roles and skills.
3. Profit and Loss Sharing: Partners split profits and losses according to their agreement, which may be equal or based on contributions.
4. Decision-Making: Partners jointly make significant decisions that impact the business.
5. Liability for Debts: In a general partnership, each partner is personally liable for any business debts and obligations.

Taxation for Partnerships

One of the main advantages of a partnership is pass-through taxation. This means the partnership itself doesn't pay income taxes.

• Profits and losses are "passed through" to the partners, who report them on their individual tax returns.
• Each partner files a 1065 with Schedule K-1, which shows their share of the partnership's income, deductions, and credits.

Depending on their income, partners may also need to pay self-employment taxes.