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Partnership

A partnership is a formal arrangement between two or more parties to jointly manage and operate a business, sharing profits and liabilities. There are generally partnerships where all partners share equally in profits and liabilities, and others where liability is limited. Partnerships allow pooling of resources but also carry additional risks if one partner takes on debt or losses.

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94 views4 pages

Partnership

A partnership is a formal arrangement between two or more parties to jointly manage and operate a business, sharing profits and liabilities. There are generally partnerships where all partners share equally in profits and liabilities, and others where liability is limited. Partnerships allow pooling of resources but also carry additional risks if one partner takes on debt or losses.

Uploaded by

qwerty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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What Is a Partnership?

A partnership is a formal arrangement by two or more parties to manage and operate a


business and share its profits.

There are several types of partnership arrangements. In particular, in a partnership


business, all partners share liabilities and profits equally, while in others, partners may
have limited liability. There also is the so-called "silent partner," in which one party is not
involved in the day-to-day operations of the business.

KEY TAKEAWAYS

• A partnership is an arrangement between two or more people to oversee business


operations and share its profits and liabilities.
• In a general partnership company, all members share both profits and liabilities.
• Professionals like doctors and lawyers often form a limited liability partnership.
• There may be tax benefits to a partnership compared to a corporation.

Types of Partnerships
In a broad sense, a partnership can be any endeavor undertaken jointly by multiple
parties. The parties may be governments, nonprofits enterprises, businesses, or private
individuals. The goals of a partnership also vary widely.

Within the narrow sense of a for-profit venture undertaken by two or more individuals,
there are three main categories of partnership: general partnership, limited partnership,
and limited liability partnership.

General Partnership

In a general partnership, all parties share legal and financial liability equally. The
individuals are personally responsible for the debts the partnership takes on. Profits are
also shared equally. The specifics of profit sharing will almost certainly be laid out in
writing in a partnership agreement.

When drafting a partnership agreement, an expulsion clause should be included, detailing


what events are grounds for expelling a partner.

Limited Liability Partnership

Limited liability partnerships (LLPs) are a common structure for professionals, such as
accountants, lawyers, and architects. This arrangement limits partners' personal liability
so that, for example, if one partner is sued for malpractice, the assets of other partners
are not at risk.1

Some law and accounting firms make a further distinction between equity partners and
salaried partners. The latter is more senior than associates but does not have an
ownership stake. They are generally paid bonuses based on the firm's profits.

Limited Partnership

Limited partnerships 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. At least one other is a silent partner whose liability is limited to the
amount invested. This silent partner generally does not participate in the management or
day-to-day operation of the partnership.1

Finally, the awkwardly-named limited liability limited partnership is a new and relatively
uncommon variety. This is a limited partnership that provides a greater shield from liability
for its general partners.2

Taxes and Partnerships


There is no federal statute defining partnerships, but nevertheless, the Internal Revenue
Code (Chapter 1, Subchapter K) includes detailed rules on their federal tax treatment.3

Partnerships do not pay income tax. The tax responsibility passes through to the
partners, who are not considered employees for tax purposes.3

Individuals in partnerships may receive more favorable tax treatment than if they founded
a corporation. That is, corporate profits are taxed, as are the dividends paid to owners or
shareholders. Partnerships' profits, on the other hand, are not double-taxed in this way.3

Advantages and Disadvantages of Partnerships


A successful partnership can help a business thrive by allowing the partners to pool their
labor and resources. Most sole proprietors do not have the time or resources to run a
successful business alone, and the startup stage can be the most time-consuming.

Creating a partnership allows the partners to benefit from one another's labor, time, and
expertise. Moreover, a shrewd partner can also provide additional perspectives and
insights that can help the business grow.

But there is also an additional risk in joining a partnership. In addition to sharing profits,
the partners may also assume responsibility for any losses or debts from the other
partners. There is also a higher chance of conflict or mismanagement. When the time
comes to exit, it may be harder to reach an agreement about selling the business.
Pros and Cons of Partnership

Pros
• Partners can pool their labor, capital and expertise.
• Partners can share tasks, allowing greater work-life balance.
• More partners can bring their experience and new perspectives to the firm.

Cons
• Partners may bring additional debts or liabilities.
• There is a greater chance of disagreement or mismanagement.
• It may become harder to sell the business.

Partnerships by Country
The basic varieties of partnerships can be found throughout common law jurisdictions,
such as the United States, the U.K., and the Commonwealth nations. There are,
however, differences in the laws governing them in each jurisdiction.

The U.S. has no federal statute that defines the various forms of partnership. However,
every state except Louisiana has adopted one form or another of the Uniform Partnership
Act; so, the laws are similar from state to state.4 The standard version of the act defines
the partnership as a separate legal entity from its partners, which is a departure from the
previous legal treatment of partnerships.5

Other common law jurisdictions, including England, do not consider partnerships to be


independent legal entities.6

How Does a Partnership Differ From Other Forms of Business


Organization?
A partnership is a way of structuring a business that involves two or more individuals (the
partners). It involves a contractual agreement (the partnership agreement) between all of
the partners that set the terms and conditions of their business relationship, including the
distribution of ownership, responsibilities, and profits and losses. Partnerships outline and
clearly define a business relationship and responsibility.

Unlike LLCs or corporations, however, partners are personally held liable for any
business debts of the partnership, which means that creditors or other claimants can go
after the partners' personal assets. Because of this, individuals who wish to form a
partnership should be extremely selective when choosing partners.1

If Partners Don't Have Limited Liability Why Set Up a Partnership?


Partnerships have several benefits. They are often easier to set up than LLCs or
corporations and do not involve a formal incorporation process through a government.
This has the added benefit of not being subject to the same rules and regulations that
apply to corporations and LLCs. Partnerships also tend to be more tax-friendly.

What About Limited Partnerships?


In limited partnerships (LPs), there are general partners who maintain operations of the
firm and have full liability, whereas limited (silent) partners, who are often passive
investors or otherwise not involved in day-to-day operations, enjoy limited liability. A
limited liability partnership (LLP) is different from an LP. In an LLP, partners are not
exempt from liability for the debts of the partnership, but they may be exempt from liability
for the actions of other partners. A limited liability limited partnership (LLLP) is a relatively
new business form that combines aspects of LPs and LLPs.1

Do Partnerships Pay Taxes?


The partnership itself does not pay business taxes. Instead, taxes are passed through to
the individual partners to file on their own tax returns, often via a Schedule K.7

What Types of Businesses Are Best-Suited for Partnerships?


Partnerships are often best for a group of professionals in the same line of work where
each partner has an active role in running the business. These often include medical
professionals, lawyers, accountants, consultants, finance & investing, and architects.

The Bottom Line


A partnership is a legal arrangement that allows two or more people to share
responsibility for a business. Those partners share the ownership and profits, but they
also share the work, responsibility, and potential losses. A successful partnership can
give a new business more opportunities to succeed, but a poorly-thought out one can
cause mismanagement and disagreements.

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