Loading the player...

What is a 'Partnership'

A partnership is a formal arrangement in which two or more parties cooperate to manage and operate a business. Various partnership arrangements are possible in which all partners might share liabilities and profits equally or some partners may have limited liability. Not every partner is necessarily involved in the management and day-to-day operations of the venture, such as in the case of a "silent partner." In some jurisdictions, partnerships enjoy favorable tax treatment relative to corporations. 

BREAKING DOWN 'Partnership'

In a broad sense, a partnership is any cooperative endeavor undertaken by multiple parties. These parties can be governments, non-profits, businesses, individuals or a combination, and the goals of the partnership can vary widely. There may or may not be a written agreement governing the partnership, but it is generally a good idea to specify terms at the outset so that disagreements can be settled according to predetermined rules. In some cases such an agreement is legally required.

Within the more narrow sense of a for-profit venture undertaken by two or more individuals, there are three main categories of partnership. In a general partnership (GP), all parties share the legal and financial liability of the partnership equally. In other words, the individuals are personally responsible for the debts the partnership takes on. Profits are also shared equally, in principle, but the specifics of profit sharing will almost certainly be laid out in a partnership agreement.

Limited liability partnerships (LLP) are a common structure for professional firms, such as accounting, law and architecture firms. This arrangement limits partners' personal liability, so that, for example, if one partner is sued for malpractice, other partners' individual assets are not at risk as a result. Some law and accounting firms make a distinction between equity partners and salaried partners, who are more senior than associates but do not have an ownership stake in the partnership. They are generally paid bonuses based on the firm's profits, but this is not required or guaranteed.

Limited partnerships (LP) are a hybrid of general partnerships and limited liability partnerships. At least one partner must be a general partner, with full personal liability for the partnership's debts, while at least one partner's liability must be limited to the amount she's invested in the partnership. Sometimes referred to as a silent partner, this partner generally cannot participate in the management or day-to-day operation of the partnership; she must have a limited role to enjoy limited liability.

Finally, limited liability limited partnerships (LLLP) are new and relatively uncommon. LLLPs are limited partnerships that provide a greater shield from liability for general partners. 

Partnership Legal Treatment

The basic arrangements described above (with the exception of LLLPs) are widespread in common law jurisdictions such as the United States, Britain and the Commonwealth. There are, however, differences between the laws in these jurisdictions, and individuals looking to found a partnership should seek professional legal advice. In the U.S., each state has its own laws governing partnerships. There is no federal statute that defines the various forms of partnership, but a majority of states has adopted one form or another of the Uniform Partnership Act, which has undergone a number of revisions between 1914 and 1997.

The standard version of the Act defines the partnership as a separate legal entity from its partners, which is a departure from previous legal treatment of partnerships. This issue has not been finalized, and not all states have adopted this language. Other common law jurisdictions, such as England and Wales, do not consider partnerships to be independent legal entities. 

Partnership Tax Treatment

While there is no federal statute defining partnerships in the U.S., the Internal Revenue Code (Chapter 1, Subchapter K) includes detailed rules on federal tax treatment. Partnerships do not pay income tax; it passes through to the partners. Partners are not considered employees for tax purposes. Individuals in partnerships may receive more favorable tax treatment than if they had founded a corporation; corporate profits are taxed, as are the dividends paid to owners. Partnerships' profits, on the other hand, are not double taxed in this way.

RELATED TERMS
  1. General Partnership

    A general partnership is an arrangement by which two or more ...
  2. Articles of Partnership

    Articles of partnership is a contract that forms an agreement ...
  3. Limited Partnership - LP

    Two or more partners united to conduct a business jointly, and ...
  4. General Partner

    Owners of a partnership who have unlimited liability. A general ...
  5. Publicly Traded Partnership (PTP)

    A publicly traded Partnership (PTP) is business organization ...
  6. Form 1065

    Form 1065 is a tax document used to report the profits, losses, ...
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. Insights

    Limited Liability Partnership (LLP): The Basics

    LLPs are a flexible, legal and tax entity that allows partners to benefit from economies of scale while also reducing their liability.
  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. Trading

    Asset Protection For The Business Owner

    Could incorporating your business help protect it? Find out here.
  5. 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.
  6. Managing Wealth

    Protect Your Personal Assets

    A family limited partnership (FLP) can go a long way toward securing your family's property.
  7. Personal Finance

    Finding Balance in Your Financial Partnerships

    Here are some thoughts on how to achieve financial equitability and personal balance in all relationships.
  8. Taxes

    Partnership Tax Filing Deadline is Now March 15th

    The deadline is now a month earlier than last year, but you can still file for an extension.
  9. 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.
  10. Taxes

    Income Tax Planning Is the New Estate Tax Planning

    Use these strategies to minimize your family’s income taxes through your estate plan.
RELATED FAQS
  1. Limited, General vs Joint Venture Partnership

    Learn the differences between general partnerships, limited liability partnerships, limited partnerships and joint venture ... Read Answer >>
  2. 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 >>
  3. 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 >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center