A partnership is a business where two or more people share ownership, contribute to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.
There are three general types of partnership arrangements:
General Partnerships assume that profits, liability and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects.
Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.
To form a partnership, you must register your business with your state, a process generally done through your Secretary of State’s office. This means you will set up your business name and likely register it as your DBA (short for “Doing Business As”).
Most businesses also have to be registered with the IRS, state and local revenue agencies, and must obtain a tax ID number or permit. A partnership must also file an “annual information return” to report the income, deductions, gains and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business “passes through” any profits or losses to its partners. Partners include their respective share of the partnership’s income or loss on their personal tax returns.
Partnerships are easier to form and run than most other business entities. They do not provide the same protections to the individuals, however, as do corporations. Like sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt. It is therefore crucial that you retain a qualified transactional attorney to draft your partnership agreement.