Key Takeaways

  • A partnership involves two or more individuals or entities co-owning and operating a business, sharing profits, losses, and responsibilities.
  • Which individuals are typically involved in the partnership include active general partners, passive limited partners, corporate entities, and sometimes professional partners in specialized fields.
  • Partnerships can be structured in several ways — general, limited, joint venture, or LLP — each affecting partner roles, liability, and management authority.
  • Clear partnership agreements are essential to define contributions, decision-making powers, profit distribution, and exit strategies.
  • Non-human entities like corporations, trusts, or LLCs can also serve as partners, expanding investment and operational capabilities.

Asking who can be a partner in a partnership is a common question for business owners wanting to form a partnership. Particularly, a partnership is a business structure in which two or more persons co-own the business and share profits.

Types of Partnerships

There are 3 unique kinds of partnerships:

  1. General partnership
  2. Joint venture
  3. Limited partnerships

General Partnership

General partnerships are owned and operated by partners who have equal responsibilities in management, oversight, and profits. There is no favor given to one partner over the other. Therefore, while the partners share in the profit, that means that they also share in the losses, including personal liability for the outstanding debts of the business.

Such partnerships have no ownership restrictions, meaning that the owners can be people, corporations, LLCs, or any other kind of business. For tax purposes, the owners will report the profits and losses on their own individual tax returns. As such, Schedule K-1 is the form that must be filled out and given to all partners. This form will identify the portion of the company’s profits and losses that each member will have to report.

Joint Venture

The joint venture is similar to the general partnership except that the partnership only exists for a specific period of time, or for a particular project. After the project ends, the joint venture is terminated.

Limited Partnership

Limited partnerships are owned and operated by two or more partners, some of whom are limited partners and others who are general partners. The limited partners are generally those who simply invest money into the business but have no oversight in the operations of the company. However, general partners have active responsibilities for overseeing the business, and thus, have greater responsibilities and liability in terms of the business’s debts and obligations.

Types of Individuals Who Can Be Partners

When forming a business, understanding which individuals are typically involved in the partnership is crucial to establishing clear expectations, roles, and legal responsibilities. Partnerships are flexible business structures that allow various types of participants, not just individual entrepreneurs. The law generally permits any “person” — which can include individuals or legal entities — to become a partner, provided they meet legal capacity requirements and agree to the terms of the partnership agreement.

Here are the most common categories of partners:

  1. Individual Entrepreneurs:
    • Most partnerships are formed between individuals who pool their skills, expertise, and capital to pursue a shared business goal.
    • Each partner typically contributes something of value — such as cash, property, labor, or intellectual property — and shares in the profits and losses.
  2. Corporate Entities and LLCs:
    • Businesses can act as partners too. Corporations, limited liability companies (LLCs), and other legal entities often enter partnerships to diversify investments, expand operations, or collaborate strategically.
    • These entities are treated as “persons” under business law, allowing them to enjoy profit-sharing rights while limiting liability exposure.
  3. Limited Partners (Passive Investors):
    • Limited partners primarily provide capital without taking part in daily management.
    • Their liability is generally restricted to their investment amount, making this role attractive for passive investors or family members looking to support a business without operational involvement.
  4. General Partners (Active Managers):
    • General partners take on active management roles, making key decisions and handling day-to-day operations.
    • They also assume unlimited personal liability for the partnership’s debts and legal obligations, which makes their role riskier but more influential.
  5. Professional Partners:
    • In industries such as law, medicine, or accounting, partnerships are often formed by licensed professionals.
    • These partners may be required to meet licensing or professional qualification standards to operate under a limited liability partnership (LLP) structure.
  6. Trusts and Estates:
    • In some cases, trusts or estates can become partners if allowed under the partnership agreement and relevant state laws. This structure is often used in estate planning or long-term investment strategies.

Clearly defining these partner types in the partnership agreement helps prevent disputes and ensures each party understands their rights and obligations. The agreement should cover contributions, management responsibilities, profit-sharing formulas, and conditions under which partners can exit the business.

Limited Liability Partnership

A limited liability partnership (LLP) starts out as a general partnership and then registers to become an LLP. The general partnership has joint and several liability for all partners; the limited partnership has at least one general partner. However, the LLP has no general partners. Thus, all partners will have limited liability. It is more difficult to establish an LLP, as some states might allow only those in certain industries to form an LLP, i.e., attorneys, accountants. When operating an LLP, the owners can be individuals or other corporations. In fact, an LLP can consist of partners that all operate as corporations. After registering as an LLP, you must file a renewal every year thereafter to avoid losing your status. For any time that lapses after renewal must be filed, the partners all become general partners and thereby, fully liable for the partnership debts.

Complications of LLPs

While there are many benefits to operating an LLP, particularly due to liability protection, there are also some complications that might occur. In addition to the ongoing requirements of operating an LLP, most LLP owners must hold additional licensing, so the other owners must ensure that all owners properly register and renew such licensing when required. An example of this would be a law firm whereby 4 attorneys oversee the business. All attorneys must remain compliant with the state’s bar requirements, paying fees bi-annually and participating in ongoing educational CLE requirements.

How is a Partnership Created?

There are no specific formalities when it comes to creating a partnership as there are with corporations and LLCs. So long as two or more people carry out business activities together, (i.e., enter into an agreement with one another), a partnership has been formed. Even if they don’t intend on entering into a partnership, it might be viewed as such. While no written contract is required, it’s advisable to have one, so to prevent potential legal issues down the line. In addition, a written agreement will solidify the partnership and ensure that all owners involved fully understand their rights and responsibilities.

An LLP does in fact require a written agreement. This is because there is an additional requirement for entering into an LLP. Since the LLP must formally register as such, the business owners must draft a written agreement indicating how the business will be operated and managed.

Considerations Before Accepting a Partner

Before determining which individuals are typically involved in the partnership, business owners should carefully evaluate prospective partners based on their contribution, legal capacity, and long-term business goals. Important considerations include:

  • Legal Capacity: All partners — whether individuals or entities — must have the legal authority to enter into a binding contract. Minors, for example, usually cannot form partnerships unless exceptions apply.
  • Financial Contribution: Partners should bring value, whether in the form of cash, property, services, or intellectual property.
  • Skills and Expertise: Active partners should complement one another’s skills to strengthen the partnership’s operational capabilities.
  • Shared Vision and Goals: Alignment on the company’s mission, growth strategy, and ethical standards is essential to avoid future conflicts.
  • Exit Strategy: Outline how partners can leave the partnership or how ownership interests can be transferred to maintain business continuity.

Drafting a comprehensive partnership agreement that addresses these considerations is one of the most effective ways to protect the business and maintain strong, collaborative relationships between partners.

Frequently Asked Questions

  1. Can a corporation or LLC be a partner in a partnership?
    Yes. Corporations, LLCs, and other legal entities can act as partners, often contributing capital or strategic resources while limiting liability.
  2. What’s the difference between a general and limited partner?
    General partners manage the business and assume full liability, while limited partners invest money but typically do not participate in management and have limited liability.
  3. Are minors allowed to become partners?
    Generally, minors cannot enter into binding partnership agreements. However, exceptions may apply under state law or with guardian involvement.
  4. Do partners need to contribute equally?
    No. Contributions can vary widely — from cash and property to services or intellectual property — as long as the terms are clearly defined in the partnership agreement.
  5. Can a trust or estate be a partner?
    Yes, trusts and estates can become partners under certain conditions, often as part of estate planning or long-term investment strategies.

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