Educational

What is a Partnership?

When discussing the various business entity types, many people wonder what a Partnership is compared to a Corporation or Limited Liability Company. A Partnership, also known as a Business Partnership, is a business entity in which two or more individuals share ownership of a business, but it is not considered a separate legal entity (unlike an Limited Liability Company or Corporation) with taxes passing through to the individual partners. This type of business is generally guided by a partnership agreement which should lay out the Partnership termination terms and other vital information about the organization.

Registering a Partnership

Partnerships, like Sole Proprietorships, generally do not require any sort of registration with the Federal, state or local governments. Although you are not legally obligated to do so, it is absolutely necessary to set up a detailed agreement. The partnership agreement should contain vital information such as:


– How will decisions be made?
– How will profits be distributed?
– How will future partners be admitted into the Partnership, and what role will they play?
– How will a Partnership dissolution occur (that is, a break-up of the partners)?
– How can partners be bought out?

Many people think that a Partnership Agreement is unnecessary because their business partner or partners are their friend (or family member). Unfortunately, the majority of partnerships that fail are the result of a lackluster agreement, or no agreement whatsoever. Because of this, we strongly suggest that all partnerships Unlike an LLC or Corporation, which are separate legal entities, a Partnership is dissolved once the partners are split up, so the above questions must be addressed in this agreement.

By default, the name of your partnership is either the name that you choose in your Partnership Agreement, or the last names of the partners. If you would like to operate under a different name but do not want to form an LLC (Limited Liability Company) or Corporation, you can file a DBA (Doing Business As) Name: Click here to learn more about DBA (Doing Business As).

Partnership Liability

Like a Sole Proprietorships, full liability is passed on to the individuals within the partnership. That is, the partners in the Partnership are liable for any debts or lawsuits that may arise out of the business – your personal assets included. The biggest downside to a Partnership or Sole Proprietorship is the liability factor. If you want more protection of your personal assets, but don’t want all of the complications of a Corporation, consider forming an LLC.

Partnership Taxes

The profits and losses of the Partnership flow through to the individual partners. This means that the partners of the Partnership report their net income or loss on their respective income tax returns.

Bottom Line

If you want to go into business with a partner, but do not want to get into the complications of forming an LLC or Inc, a Partnership may be the best option for you.