What is a partnership?

A partnership is an association of two or more persons who carry on as co-owners and share profits.
There can be a contribution of money (capital investment in the business project) or services in return
for a share of the profits.

What are the different types of partnerships?

There are three types of partnerships -- general partnerships, joint ventures, and limited partnerships. In
a general partnership, the partners equally divide management responsibilities, as well as profits. Joint
ventures are the same as general partnerships except that the partnership only exists for a specified
period of time or for a specific project.

Limited partnerships consist of partners who maintain an active role in the management of the business,
and those who just invest money and have a very limited role in management. These limited partners
are essentially passive investors whose liability is limited to their initial investment. Limited partnerships
have more formal requirements than the other two types of partnerships.

How is a partnership created?

There are no formalities for a business relationship to become a general partnership. This means you
don't have to have anything in writing for a partnership to form. The key factors are two or more people
who are carrying on as co-owners and sharing profits. Even if you don't intend to be a partnership, if
that's how you hold yourself out to the public, then your relationship will be deemed a partnership and
all partners will be liable for the obligations of the partnership (see liability issues below). Although
there's no requirement for a written partnership agreement, often it's a very good idea to have such a
document to prevent internal squabbling (about profits, direction of the company, etc.) and give the
partnership solid direction.

Limited liability partnerships do have a writing requirement. It's a document that states that a limited
partner has invested money into the partnership and retains little or no control over the partnership's
operations. In this way, limited partners will not be held liable for the partnership's debt obligations and
the partnership won't be influenced too greatly by the limited partner.

Are there rules on how partnerships are run?

The only requirement is that in the absence of a written agreement, partners don't draw a salary and
share profits and losses equally. Partners have a duty of loyalty to the other partners and must not
enrich themselves at the expense of the partnership. Partners also have a duty to provide financial
accounting to the other partners.

For example, if you're in a partnership, you cannot make a deal to buy from a supplier at an inflated
price with the understanding that you will receive a kickback from the supplier. It's a violation of your
duty to the partnership, and your partners can demand an accounting from you regarding the deal. If
you're found to have violated your duties, the partners can sue you for damages and strip you of your
profits from the deal.

On the other hand, if you simply make a bad deal by signing a contract to pay a supplier an inflated
price, the partnership will be forced to accept the deal. One of the potential drawbacks of a partnership
is that the other partners are bound to contracts signed by each other on behalf of the partnership.
Choosing partners you can trust, and who are savvy, is critical.

FINDLAW NEWSLETTERS

Stay up-to-date with how the law affects your life

Learn more  about FindLaw’s newsletters, including our terms of use and privacy policy. 

This site is protected by reCAPTCHA and the Google  Privacy Policy  and  Terms of Service  apply.

The only other rules would be found in a written partnership agreement. Such an agreement could
outline procedures for making major business decisions, how profits and losses will be split, and how
much control each partner maintains.

Do partnership agreements need to be in writing?

Partnerships are unique business relationships that don't require a written agreement. However, it's
always a good idea to have such a document. Because partners share profits equally in the absence of a
written agreement, you could run into situations where you feel that you're doing all of the work, but
your partner is still getting half of the profits. It's always smart to cover major issues related to your
business in writing.

What's my personal liability for the business obligations of the partnership?

Partners are personally liable for the business obligations of the partnership. This means that if the
partnership can't afford to pay creditors or the business fails, the partners are individually responsible to
pay for the debts and creditors can go after personal assets such as bank accounts, cars, and even
homes.

For example, if the partnership dissolves and there are still outstanding debts to suppliers or lenders,
those creditors can sue you personally to pay for the debts. Debts of the partnership will expose your
personal assets to liability unless you're a limited partner, in which case your liability is limited to the
money you've invested.

What's the difference between a partnership and forming a corporation?

The major difference is that in a partnership, creditors can sue you personally to repay business debts,
whereas if you form a corporate entity, such as a limited liability company (LLC) or an S-corporation, the
debt trail ends with the business.

In the example above, if you had formed an LLC instead of a partnership, your personal assets would be
safe from creditors of the business. In legal parlance, creditors cannot "pierce the corporate veil",
meaning the formation of the corporate entity forms a protective shield around your personal assets.
It's a major advantage of forming an LLC, but LLCs also require more paperwork and money to register,
start up, and maintain.

How are taxes paid by partnerships?

Taxes are paid through the personal income tax filings of individual partners. As a partner, you have
income through your share of the profits (or a loss if the partnership is losing money), and you report
this income on your personal taxes. The partnership itself reports profits and losses to the IRS on a
special form (so that the IRS knows how much you receive), and you pay the taxes on your portion.

How do partnerships terminate?

In the absence of a written agreement, partnerships end when one partner gives notice of his express
will to leave the partnership. If you don't want your partnership to end so easily, you can have a written
agreement that outlines the process through which the partnership will dissolve. For example, the
partnership can dissolve if a certain event happens or it can provide a mechanism whereby the
partnership can continue if the remaining partners agree to do so.

What are the advantages of forming a partnership?

 easy to establish

 raising funds may be easier with more owners

 profits go right into partners' pockets, providing for easier tax reporting

 partners can combine their individual talents to complement each other and strengthen the
partnership

 employees may be attracted to work for the partnership if they have an opportunity to become
a partner

What are the disadvantages of forming a partnership?

 partners are individually liable for business debts

 partners are subject to the actions of other partners

 limited life of a partnership -- if one partner leaves the partnership can end

 shared decision making means you do not have full control, which could lead to disagreements
or paralysis of the partnership