A partnership provides a simple way for two or more people to own a business together. In most states, a partnership can either be a general partnership, limited partnership, or limited liability partnership.
Start-ups with multiple owners testing a business idea before a full business launch usually form a general partnership. They are also used in joint venture situations. Most joint ventures are general partnerships that will exist until the project is completed or up to a determined date.
Each partner in a general partnership will have the same authority and responsibility under a general partnership.
A general partnership is formed by an agreement by two or more persons or entities to engage in a business. This usually requires an agreement to share profits and losses. No filing is necessary to create a partnership, but it is advisable to have a partnership agreement in place (and it should be noted that the partnership still needs to comply with other business registration, filing, and tax requirements).
The partnership agreement is the governing document in a partnership. The partnership agreement defines the responsibilities of each partner and outlines ownership interests and rights. It is similar to “By Laws” for a corporation or the “Company Agreement” in an LLC. Partner disputes are common. They often end up in court. Written partnership agreements can go a long way in avoiding these types of costly disputes.
Partners in a general partnership have no personal liability protection. All partners can be jointly and severally liable. When a partner facing a lawsuit has no money, an individual may go after the partnership and sue to receive compensation by forcing other partners to be liable. This is why most partnerships are limited partnerships or limited liability partnerships.
Business owners wanting to limit a partner’s exposure or authority can create a Limited Partnership or LP. Investors and business owners often form limited partnerships to raise capital for certain assets or investments.
A limited partnership requires at least one general partner with unlimited liability and one or more limited partners. Limited partners are not liable beyond their initial investment, as long as they have not taken an active role in the partnership.
LPs are not required to file the partnership agreement with the state, but they usually have to file a certificate of formation with the state.
Limited Liability Partnership
Many states also provide for Limited Liability Partnerships or LLPs, which is another type of partnership structure. This business structure is a hybrid between a corporation and a general partnership.
With an LLP, all partners are limited partners and they are not responsible for the actions of other partners. This business structure is ideal for practicing professionals, like accountants and lawyers.
LLPs have to file a certificate of limited partnership with the state.
Partnerships are pass-through entities for tax purposes. This means that they compute and report their items of income and expense on their own income tax returns, but they do not pay tax on those items.
Instead, partnerships issue Schedules K-1 to the partners and the partners pick up and report the partnership items on their individual income tax returns. Thus, a partner’s share of the business income or loss will flow through to and be reported on the partners’ personal income tax returns.