A partnership involves two or more people (up to 20, with some exceptions) going into business together with a view to making a profit. In various countries, it is ruled by various company laws
There are two types of partnership – general and limited.
A general partnership is where all partners participate to some extent in the day-to-day management of the business.
A limited partnership is one formed by up to 20 people. It has at least one general partner who controls the company’s day-to-day operations and is personally liable for business debts, and passive partners called limited partners.
A limited partner contributes a defined amount of capital to the business but is not otherwise liable for its debts or obligations.
Before entering into a partnership it is advisable to have a lawyer prepare a formal agreement outlining:
It is important to have a formal agreement because personal liability is unlimited for each partner.
You will be held liable for any shortfall if the business fails and a partner can’t afford to pay their share of any debts. You are also jointly responsible for any debts your partner incurs, with or without your knowledge.
If there is no agreement in place, each partner is deemed to own equal shares of each asset.
The partners are taxed from the income (or loss) of the partnership on their personal income tax return, and the partnership files an information return with the IRS.
Multiple-member limited liability companies (LLCs) file income taxes as a partnership.
Check with your state's secretary of state to determine the requirements for registering your partnership in your state.
Depending on the type of partnership and the levels of partnership hierarchy, a partnership can have several different types of partners. This article on different types of partners explains the difference between:
Before you start a partnership, you will need to decide what type of partnership you want. You may have heard the terms:
Partnerships are usually registered with the state in which they do business, but the requirement to register varies from state to state. Partnerships use a partnership agreement to clarify the relationship between the partners, roles and responsibilities of the partners, and their respective shares in the profits or losses of the partnership.
It is relatively easy to form a partnership, but, as noted above, the business must be registered with the state where the partners do business. Depending on the state, you may have the choice of one or more of the types of partnerships mentioned above. Once you have registered with your state, you can then proceed to the other typical tasks in starting a business.
When a partnership is formed, one of the first acts of the partners should be to prepare and sign a partnership agreement. This agreement describes all the responsibilities of the partners, sets out each partner's distributive share in profits and losses, and answers all the "what if" questions about what happens in a number of typical situations.