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Partnership

An unincorporated business that two or more parties form and own together

What is a Partnership?

An unincorporated business structure that two or more parties form and own together is called a partnership. These parties, called partners, may be individuals, corporations, other partnerships, or other legal entities.  

Partners may contribute capital, labor, skills, and experience to the business. They may have unlimited legal liability for the actions of the partnership and its partners.  

The most common type of partner is a general partner, who actively manages and exercises control over the business operations.  

Limited partners have limited legal liability. This type of partner cannot manage or exercise control over the business.

Among the most common types of partnerships are general partnerships (GP), limited partnerships (LP), and limited liability partnerships (LLP).  

A partnership can even start without an oral or written contract. Where there is a written contract between the partners, it is called a partnership agreement. The partners agree on the purpose of the partnership and their rights and responsibilities.

A partnership splits its profit or loss among its partners. They are responsible for filing and paying taxes for their portion of the partnership profit.

This form of business is similar to a joint venture. A joint venture is where two parties (typically corporations) carry on a business together, though not necessarily for profit.

Partnership

Key Highlights

  • Partnerships are unincorporated businesses with two or more owners (partners) who contribute in various ways (capital, labor, etc.) and may have legal liabilities.
  • A written agreement should outline the partners’ roles, rights, and responsibilities. It can provide clarity on capital interests, profit splitting, and business continuity in case a partner departs.
  • Partnership profits and losses flow to the partners, who file and pay taxes on their portion.

Types of Partners

Partnership - Types of Partners

General Partner:

  • May contribute capital and expertise to the partnership.
  • Actively manage and exercise control over the business operations.  
  • Have unlimited legal liability for the acts and obligations of the partnership. Their assets are subject to any legal claims made against the partnership.
  • Can be a party to any legal claims made by the partnership or any claims made against the partnership and its partners.

Limited Partner:

  • May only contribute capital (assets, cash, etc.) to the partnership.
  • Do not manage and cannot exercise control over the business operations.  
  • Have limited legal liability for the acts and obligations of the partnership. Only their contributions to the partnership, not their assets, are subject to any legal claims against the partnership.
  • Cannot be a party to any legal claims made by the partnership or any claims made against the partnership and its general partner(s).

Types of Partnerships

General Partnership

General partnerships (GP) are the easiest and cheapest type of partnership to form.  Two or more general partners own it, with joint and several legal liabilities for all debts and obligations. They jointly manage and control the business.

A general partnership can immediately start when partners decide to conduct business together, even without an oral or written contract. This ease contrasts with potentially costly disputes that may arise between partners if they cannot resolve them amicably.  

This type of partnership is simple to dissolve. For example, the partnership dissolves if any partners leave, go into bankruptcy, or pass away. Partnership rules differ worldwide. Some jurisdictions may offer alternatives for the remaining partners who wish to continue with the business[1].

Except for registering a business name, there are few government requirements specific to this type of partnership[2].

Ongoing government requirements are also limited. For example, holding an annual general meeting like a corporation or other kinds of business structures is unnecessary.  

The partnership and its partners must regularly report and pay taxes on the partnership income. Taxes are paid by the partners rather than by the partnership[3].

A partnership agreement is valuable for many general partnerships. For example, it can describe a process to value and compensate a departed partner for their business interest. The transfer of interest may be more attractive to the remaining partners instead of dissolving the business altogether.

Limited Partnership

A limited partnership (LP) is a type of partnership that limits the legal liability of some partners for debts and obligations. At least one limited partner is a passive contributor of cash and assets.  

An LP gives contributors a way to invest without incurring legal liability. In some jurisdictions, this business structure is considered a separate legal entity that can enter into contracts and take on obligations.

There is at least one general partner with unlimited legal liability. The general partner manages and controls the business.

When starting or dissolving this partnership, the LP must register and report to the local authorities. It is more expensive and complex than forming a general partnership.

To start, an LP must register the limited partnership’s name and the general partners’ details with the local authorities. To dissolve, an LP typically files a document, sometimes called a “Statement of Dissolution” or “Statement of Cancellation.”

A written contract is an essential component when forming this type of partnership[4]. A partnership agreement between partners covers their rights and responsibilities while protecting the limited partner’s contributions.  

There may be ongoing government requirements. For example, some jurisdictions need LPs to regularly file information reports to local authorities responsible for businesses in the area. However, holding an annual general meeting is not mandatory unless stated in the partnership agreement, unlike a corporation or some other kind of business structure.

The partnership and its partners must regularly report and pay taxes on the partnership income. The partners’ portion is outlined in the partnership agreement. Taxes are paid by the partners rather than by the partnership.

Limited Liability Partnership

A limited liability partnership (LLP) is an extension of a general partnership that limits the legal liability of all partners. General partners in this type of partnership have protection from the wrongful acts of the other partners, such as negligence, misbehavior, and other unprofessional conduct.  

In jurisdictions where this business structure is available, it is considered a separate legal entity that can enter into contracts and take on obligations.  

Local authorities may restrict the structure to eligible businesses in knowledge-based industries, for example, legal and accounting professionals. Authorities may require proof of permission from the professional governing body before partners may form an LLP.

The partners manage and control the business.

When starting or dissolving this partnership, an LLP must register and report to the local authorities. It is more expensive and complex than forming a general partnership.

To start, an LLP must register the limited liability partnership’s name and the number of partners with the local authorities. To dissolve, an LLP typically files a document, sometimes called a “Statement of Dissolution” or “Statement of Cancellation.”  

A written contract is an essential component when forming this type of partnership[4]. A partnership agreement between partners covers their rights and responsibilities while protecting the partner’s contributions.  

There are ongoing government requirements. For example, an LLP must regularly file information reports to local authorities responsible for businesses in the area. However, holding an annual general meeting is not mandatory unless stated in the partnership agreement, unlike a corporation or other kinds of business structure.

The partnership and its partners must regularly report and pay taxes on the partnership income. The partners’ portion is outlined in the partnership agreement. Taxes are paid by the partners rather than by the partnership.

Partnership Agreement

In business, a partnership agreement is a contract stating the terms of a partnership – what it does, how it works, and how the partners can work together. The rights and responsibilities of the partners are a vital component.

An agreement can provide a way to handle capital interests if a partner departs. A sudden need to reorganize capital investment disrupts the business if a contract is not in place.  

At the minimum, the departing partner (or their estate) expects to recover their contributions, assuming the partnership has been profitable. It may not be feasible if neither the partnership nor the remaining partners have enough liquid assets to return the contributions.  

An agreement can describe other options, such as the process of valuing and transferring the departing partner’s interest to the remaining partners, rather than dissolving the business entirely.

Attracting new partners can also be challenging if the partnership needs to expand beyond the partners’ existing capacity. An agreement can set the rules for adding partners. The structure can attract prospective partners who do not have prior experience working together.

As partners jointly make decisions, disputes can occur. Any decision and dispute resolution process built into the agreement can provide a path forward. This process can save time, money, and effort.  

A partnership agreement can reduce uncertainty when the partners need to finalize any decisions or resolve a dispute[4].

Additional Resources

Thank you for reading CFI’s guide to Partnerships. To learn more and advance our career, check out the informative CFI resources below:

Article Sources

  1. Uniform Law Commission – Partnership Act
  2. IRS Publication 541 – Partnership, Form a Partnership
  3. IRS – Tax Information for Partnership
  4. Partnership agreements: A primer
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