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.

Profits or losses for each general partner are reported 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 set up 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 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. Which terms should be included in a partnership agreement?

    Understand what specific terms should be included in a business partnership agreement and how each affects the partners in ... Read Answer >>
  2. What are the primary disadvantages of forming a joint venture?

    Learn the disadvantages to forming and maintaining a joint venture partnership, including factors business owners should ... Read Answer >>
  3. What are the primary advantages of forming a joint venture?

    Understand what the advantages of a joint venture are and discover what make this business strategy a good alternative to ... Read Answer >>
  4. Do I pay capital gains taxes on a house that my company sells back to myself?

    The answer depends on the type of legal entity your business is organized as and operated through. Read Answer >>
  5. What are Schedule K-1 documents used for?

    The Schedule K-1 is a tax document issued for an investment in partnership interests. Learn more today! Read Answer >>
Related Articles
  1. Taxes

    What's the Purpose of IRS Form 1065?

    Business partners need the information on this form to complete their own tax returns. Here are the details.
  2. Small Business

    MLPs and Limited Partnerships: How They Differ

    Find out how limited partnerships and master limited partnerships (MLPs) differ in their types of business ownership and tax treatment.
  3. Financial Advisor

    How Master Limited Partnerships are Taxed

    MLPs are a different animal when it comes to taxes. Here's how they work.
  4. Taxes

    How Private Equity and Hedge Funds are Taxed

    Private equity and hedge funds offer an appealing tax structure for those who can afford to invest in them. Here's why.
  5. 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.
  6. Investing

    MLP Investors to Benefit Under a Trump Tax Regime

    Trump’s new tax plan could spell big savings for investors in master limited partnerships.
  7. Investing

    Reviewing Liabilities On The Balance Sheet

    As an experienced or new analyst, liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date.
  8. Investing

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
  9. Financial Advisor

    How to Protect Assets from Creditors and Lawsuits

    Proper planning is required to ensure that a client’s assets are truly protected. Here are some strategies that can help shield them from seizure.
  10. Taxes

    Taxes in Texas for Small Business: The Basics

    Learn the tax implications for small businesses in Texas, and discover how different types of small businesses, such as LLCs and S Corporations, are taxed.
RELATED TERMS
  1. General Partnership

    A general partnership is an arrangement by which two or more ...
  2. Limited Partner

    A limited partner is a business partner whose liability is limited ...
  3. Limited Partnership Unit

    A limited partnership unit is an ownership unit in a publicly ...
  4. Schedule K-1

    A Schedule K-1 is a document used to describe incomes, losses ...
  5. Subscription Agreement

    A subscription agreement is an application by an investor to ...
  6. Uniform Partnership Act (UPA)

    The Uniform Partnership Act (UPA) provides governance for business ...
Trading Center