A partnership company is any business involving at least two individuals who have agreed to partner with one another. This includes contributing funds to the business, sharing resources and skills, and weathering the ups and downs of running a company.

What Is a Partnership?

Partnerships can include individuals who have a direct role in operating the business as well as those who do not. Partners with a limited role have only limited liability for business obligations and debts. New partners can join the partnership after it has already been established, provided they invest capital in the business. Generally, profits and losses are divided based on investment percentages.

Types of Partnerships

Three common types of partnerships are recognized by the federal government:

  • General partnership, in which partners are involved in the company's daily operations and share liability for its debts and legal obligations.
  • Limited partnership, in which one partner manages the business and has liability, and others do not participate in operations and have liability limited to their investment percentage.
  • Limited liability partnership, in which more than one partner can serve as a manager and others are non-participatory partners.

Each of these partnership types can be structured as a limited liability company (LLC). This is advantageous because with this type entity, your personal assets are protected from business liability. You can also retain flexibility in allocating profits and losses as well as in managing the business.

Types of Partners

Partnerships can consist of various partners with different responsibilities and levels of hierarchy.

  • General partners participate in administration and have liability for business debts.
  • Limited partners invest financial capital only.
  • Equity partners have a share in ownership.
  • Salaried partners are paid as employees.

Advantages and Disadvantages of a Partnership

Unlike a corporation, a partnership does not exist as an independent business entity separate from its owners. Profits and loss are divided among the partners. This means that the partnership has the advantage of pass-through taxation, which means it pays federal income tax only at the individual level and not at the corporate level.

Each year, the partnership files IRS Form 1065 to report its income and losses. Each partner receives a Schedule K-1 to be filed with his or her individual tax return. This indicates his or her share of the partnership's profits and losses.

In a general partnership, each partner has the authority to take out loans, make decisions, and otherwise act on behalf of the business.

If you structure your business as a general partnership, you will be personally liable for business debts, which is a major disadvantage of this entity.

Partnerships are generally more expensive to establish than other business structures such as sole proprietorships.

Advice to Follow When Forming a Partnership

It's important to start your business by establishing a partnership agreement that details the responsibilities of each partner, including how decisions and buyouts are made and how disputes that arise must be resolved. It indicates each partner's ownership share and how profits and losses are distributed. A business attorney can help you prepare partnership documents that address relevant "what-if" situations.

Make sure you trust those you form a partnership with and those you deal with in the business, such as tenants, contractors, and vendors. You may need to call references and conduct background checks. Even when partnering with friends or family members, disputes can arise. Every partner's spouse should also sign the partnership agreement since they also have an ownership interest in the business. They also must agree because this agreement indicates the buyout provisions in the event of a divorce.

Communication and documentation are necessary for a thriving partnership. Any changes to the partnership agreement should be put in writing and signed by every partner. Understand your duties and responsibilities, and address those that are not being successfully fulfilled.

Make sure to pay attention to careful bookkeeping and tax records. You should make sure to make tax payments on time and in full. Avoid partnership income that exists on paper but is not distributed as profits to the partners. This can create issues on each partner's individual tax return.

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