A partnership is a form of business where two or more people share ownership and responsibility for a company. Business partners receive profits and are liable for debts based on the terms of a partnership agreement.
There are several recognized types of business partnerships, and unlike corporations, they are not taxed separately from individual partners. Find out more about partnerships in this explainer post.
What is a partnership?
A partnership is an unincorporated arrangement by two or more parties to manage and operate a business, share its profits, and be responsible for its debts and obligations.
Partners can be individual people, corporations, or other types of businesses. General partners are actively involved in work and contribute labor or knowledge. In contrast, limited partners may be restricted to only contributing capital.
There are several types of partnerships. Within those arrangements, partners can create agreements to define roles and responsibilities. Agreements govern most partnerships.
What goes into a partnership agreement?
A general partnership agreement can be written or oral. It can be modified with the consent of all partners and will likely contain information on:
- The stake each partner has in the business
- Partner roles and responsibilities within the businesses
- Profit and loss sharing arrangements
- Provisions for ending the partnership
- Provisions for modifying the partnership and adding new partners
- Grounds for removing a partner
Types of partnership
In for-profit business, there are three main categories of partnership, as well as joint ventures. These partnership types apply in common law jurisdictions like the US, UK, and commonwealth countries.
General partnership (GP)
General partners are actively involved in daily tasks and can contribute labor and expertise, as well as capital, to the business.
However, general partners are also responsible for all partnership activities, even those they’re not directly part of. Their personal assets are subject to legal claims against the partnership.
Limited liability partnership (LLP)
In a limited liability partnership (LLP), all partners are responsible for their conduct but have limited liability for the wider business. Only a partner’s contributions to the partnership are subject to legal claims—not their personal assets.
This level of asset protection is why LLPs (or a state-specific equivalent) are a standard business structure for professional businesses, such as accountants, lawyers, doctors, and architects.
If one business partner is sued for malpractice, for example, the assets of other partners are not at risk—even if the partnership defaults.
Limited partnership (LP)
Limited partnerships (LPs) have a general partner with unlimited liability. All other partners have limited liability. In this way, LPs are a hybrid between GPs and LLPs.
One benefit of a limited partnership is that it allows people to invest in your business without becoming personally liable. All partners besides the GP tend to have limited control over the company, as documented by a partnership agreement.
A joint venture is a more general business agreement that may or may not be a partnership.
When a joint venture describes the sharing of expenses, short-term collaboration, or the pooling of resources, it doesn’t refer to an official partnership.
However, if a joint venture has no specific goal or end date, it may count as a general partnership.
The pros and cons of entering a business partnership
Sole proprietors often face challenges surrounding time management, finding resources, and connecting with experts within their industry. Forming a partnership can be an effective way to solve these issues by pooling labor, resources, and experience.
On the other hand, a poorly considered partnership can leave you personally liable for actions taken by others within your business.
Here are some pros and cons of structuring a business as a partnership.
- General partnerships are easy to set up and maintain over time.
- Partners can pool resources to invest in tools and infrastructure.
- Partners can share the workload and bring in prior expertise.
- When correctly established, a limited partnership protects partners’ liability.
- The prospect of partnership is an incentive for employees.
- Unresolved differences of opinion among equity partners can threaten a business.
- A poorly written partnership agreement can create disagreements over profit and liability allocations.
- Managing a limited liability partnership and staying compliant with tax and legal regulations takes additional time.
- Limited partners may feel less personally motivated about the success of a business.
Business partnerships are required to report their income, losses, and other financial information. However, partnerships do not file income tax.
Because there is no federal statute defining partnerships, tax responsibility passes through to partners, who file and pay taxes on their portion of partnership profits and losses.
As a result, a partnership should issue a K-1 (1065) form to all partners to be included in their personal income tax filings.
Partners are not usually employees, so they don’t need to file W2 forms. However, general partners should check whether they classify as self-employed and file any relevant paperwork.
This tax status is a commonly cited benefit of partnerships over other business structures, such as corporations, which are taxed in addition to shareholders.
Partnership tax resources
- The IRS has a list of tax forms that may be relevant to partnerships.
- Chapter 1, Subchapter K of the Internal Revenue Code covers tax regulations for partners and partnerships in detail.
- The IRS provides a detailed explanation of partnership definitions and rules for distributing profits and liabilities to partners in its Publication 541.
Other business types
Alongside partnerships, businesses can be organized in other ways. Popular business structures include sole proprietorships, corporations, and nonprofits.
Most of the advantages of sole proprietorships relate to their simplicity. There’s no legal distinction between the owner and the business, so the owner receives all profits and assumes all liabilities.
There are several types of corporations, which are legal entities separate from their owners—known as shareholders. This means that the corporation itself, not the shareholders, is legally liable.
Nonprofit organizations operate to fulfill a mission statement or further a social cause, rather than to generate profit. Because of this, they are eligible for tax-exempt status.
💡 Learn about other types of businesses in this post.
Choose your partner wisely
Before entering into a general or limited partnership, make sure there’s a clear partnership agreement to define responsibilities, liabilities, and what happens if things don’t work out.
The type of partnership you choose, and the parties you partner with, will have a big impact on your business and professional journey.
What is a business partnership?
Partnership in a business context refers to two or more individuals who form a business entity together. Business partners agree to share the profits, losses, and management of a company. Unless otherwise stated in a partnership agreement, each partner has equal interest and shares in the decision-making process, regardless of the amount of money they initially contribute to the partnership.
What are the 3 types of partnership?
- General partnership: This is the most common type of partnership and involves two or more people jointly responsible for managing a business and sharing profits.
- Limited partnership: This type of partnership involves a general partner who manages the business and limited partners who invest money but have minimal control and liability.
- Joint venture: A temporary partnership between two or more parties for a specific business project or venture.
Is a partnership always 2 people?
While a partnership must include at least two people, it can also contain more, as well as corporations and other entities.