A:

A partnership is a business agreement between two or more people who are called "partners." Each partner owns a share of the business personally. This is a less expensive business structure and is more customizable than a corporation. The attractive attribute of a partnership is that profits and losses are passed on directly to the partners, thereby avoiding double-taxation incurred through a corporation. There are three types of partnership structures: general partnerships, limited liability partnerships and limited partnerships. Each has unique characteristics, benefits and risks. A fourth category—joint venture partnership—is a separate type of business structure.

General Partnership

A general partnership is an agreement between two or more people who share equally in the profits and liabilities of a company. This can be as informal as a verbal agreement made over coffee or a formalized contractual agreement between partners. There are no requirements for business structure or governance; it is entirely up to the partners to define how the company is to be run and who runs it.

Each general partner receives profits and losses as personal income on a Schedule K-1 and the company itself is not taxed on earnings. Corporations are subject to tax on earnings passed on to the owners, who pay tax on the same earnings on their personal income tax returns. Avoiding this double-taxation is a key advantage to owning a partnership.

General partners are also responsible for the company's solvency and liabilities, making this arrangement very risky. Unlimited liability rests on each partner, even if one partner is solely responsible for any illegal activities or financial problems. Further increasing the risk for general partners is the fact that each can act independently on behalf of the company without consent from the other partners.

Limited Liability Partnership

Limited liability partnerships offer the same tax advantages as a general partnership but include some protection for partners' personal assets by limiting their liability to their interest in the company. All partners are allowed to manage the business, similar to the general partnership; however, a formal agreement is required for this business type. This structure keeps all partners from subjecting their personal assets to business liabilities. For example, Jim and Bob are attorneys and set up a limited liability partnership to share in each others' success. Their firm is sued by a former client, but neither Jim nor Bob have personal assets at risk.

Limited Partnership

Though they share similar names, a limited liability partnership and a limited partnership are quite different. A limited partnership requires at least one partner to manage and take on all risk, while passive limited partners enjoy no liability. The specific rights and responsibilities of limited partners must be laid out in the partnership agreement. For investment purposes, a limited partner is a prudent position in a partnership because only the partnership interest is subject to liability; however, legal limits on the actions of limited partners can be too restrictive for some.

Joint Venture

Joint ventures exist in between contractual arrangements and limited liability partnerships. As with contracts, joint ventures are generally short-lived, however, they are legal entities that need to be formed and registered like a corporation or partnership. Why would business associates want to form a joint venture rather than just sign a contract? Ventures are necessary when the project is complex enough to require a specific management team or needs its own operating infrastructure. A contract can't raise capital, but a joint venture can.

(For related reading, see: How are business decisions made in a partnership?)

RELATED FAQS
  1. Can I buy insurance to reduce unlimited liability in a partnership?

    Find out why it is important to safeguard your general partnership in the even that one member becomes disabled, dismembered ... Read Answer >>
  2. What is the difference between a silent partner and a general partner?

    Understand the difference between a person designated as a silent partner and a general partner under the partnership business ... Read Answer >>
  3. How are joint ventures regulated in the United States?

    Learn how joint ventures are governed in the United States, and discover why tort law is so important for upholding the contracts ... Read Answer >>
Related Articles
  1. Small Business

    MLPs and Limited Partnerships: How They Differ

    Limited partnerships and master limited partnerships have one difference that makes all the difference.
  2. Small Business

    4 Business Partnership Mistakes To Avoid

    When two or more people get together to run a business, the odds of conflict and financial risk increase without the proper controls in place.
  3. Small Business

    Using Life Insurance as a Business Succession Plan

    Life insurance can be a good succession plan tool for business partnerships.
  4. Trading

    Asset Protection For The Business Owner

    Could incorporating your business help protect it? Find out here.
  5. Financial Advisor

    How Master Limited Partnerships are Taxed

    MLPs are a different animal when it comes to taxes. Here's how they work.
  6. Small Business

    What is Unlimited Liability?

    Unlimited liability means that the owners of a business are liable for the entire amount of debt and obligations of that business.
  7. Investing

    Breaking Down Energy Transfer's Corporate Anatomy (ETE, ETP)

    Recently, Energy Transfer Partners (NYSE: ETP) and its general partner, Energy Transfer Equity (NYSE: ETE), completed the announced merger with Regency Energy Partners, a move that was designed ...
RELATED TERMS
  1. Limited Partnership - LP

    Two or more partners united to conduct a business jointly, and ...
  2. Publicly Traded Partnership (PTP)

    A publicly traded Partnership (PTP) is business organization ...
  3. Schedule K-1

    A tax document used to report the incomes, losses and dividends ...
  4. Articles Of Partnership

    A document that formalizes an agreement between parties who want ...
  5. Subscription Agreement

    An application by an investor to join a limited partnership. ...
  6. Form 1065

    A tax document used to report the profits, losses and deductions ...
Hot Definitions
  1. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  2. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  3. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  4. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  5. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center