Business Entity: What is a Partnership?

October 26, 2020
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Creating a partnership can be a great way to propel your small business. You should be aware of some things, such as the partnerships that you can form and the liability differences between the types. 

What is a Partnership?

A partnership is a relationship between two or more people that agree to conduct business together. Members, called partners, invest their money in the company. Depending on the partner’s role in their partnership, their liability is limited or unlimited. 

Most partnerships will have a: 

  • A general partner who is active in managing and operating the business
  • Limited partners who invest in the business but don’t take part in its management or operation of the business 

To form a partnership, you’ll work with your state’s Secretary of State. You may have to work with other state departments if the Secretary of State won’t form your partnership. 

What’s the Role of a Partnership in Business?

Partnerships play essential roles in businesses. If you set up a partnership, you’ll need a partnership agreement. This will establish the duties and responsibilities expected out of every partner. 

Partners can use this advantageously to highlight the terms in which they will conduct, manage, and operate their business. Partnership agreements are also useful for designating the conditions that members can leave the partnership or designating how a partnership can be dissolved.

What are the 4 Types of Partnerships?

There are four types of partnerships

  • General partnerships 
  • Limited liability partnerships
  • Limited partnerships
  • LLC Partnerships, or LLCs with multiple members

A summary of each type of partnership and members’ liabilities follows.

LLC Partnerships (Multi-Member LLC)

LLCs with multiple members are considered partnerships for tax purposes. Members of an LLC with multiple members should file Form 1065

You may want to consider forming a multi-member LLC to avoid personal liability. All LLC members enjoy limited liability, whereas, in other partnership types, only limited partners have similar protection. 

Limited Liability Partnership

A limited liability partnership consists of two or more partners. All partners are considered general partners who operate the partnership. Partners in a limited partnership have limited and shared liability.

All members in a limited liability partnership share liability. The liability can’t exceed the amount of money used as an investment into the partnership.

In most cases, a limited liability partnership will also protect individual partners from others in cases of negligence.

Limited Partnership

A limited partnership also consists of two or more partners:

  • One or more general partners, who operate the partnership with unlimited liability
  • One or more limited partners, who don’t operate the partnership without liability

Members in a limited partnership can have limited liability. However, this applies only to limited partners. This means that they are liable only for the amount of money they’ve invested in the business. 

General Partnership

A general partnership involves at least two people. Partners involved in general partnerships can individually enter binding agreements, business deals, or contracts. 

It differs from other partnerships in important ways, though. General partnerships can end if: 

  • A partner becomes disabled
  • A partner leaves the partnership
  • A partner passes away

In a general partnership, partners involved will have unlimited liability. This means that if their partnership experiences legal trouble, both business assets, and personal assets are at risk.

What are the Advantages of a Partnership? 

A partnership has at least five advantages compared to other business entities. They are: 

  • Balanced workload 
  • Decreased required paperwork
  • Easier taxation
  • Partner replacement process
  • Potential capital and investments

The workload within a partnership is the first advantage that partnerships offer. Their flexibility can allow partners that excel in certain parts of a business to work together to bring the best results to the business and the partnership. 

Partnerships require less paperwork than other business entities. You won’t have to complete as many federal, local, or state requirements to form a partnership. 

All partnerships and multiple-member LLCs file and pay taxes individually. Partners will do this by completing IRS Form 1065, U.S. Return of Partnership Income, and reporting credits, income, gains, or losses.

Replacing partners in a partnership is the second advantage of partnerships. As with a balanced workload, replacing partners in a partnership is something that partners will elaborate on in their partnership agreement. This will ensure that there is a mutual understanding amongst all members. 

Finally, it can be an advantage to have a partnership for investment opportunities. Partnerships with limited liability will only be liable for the charges that they invest in the business. This can make finding investors less difficult than other business types.

Work with the Pros

Forming your business as a partnership can be a great decision. Work with the pros at 1-800Accountant today for your entity formation needs! We take the stress and guesswork out of accounting and provide top-notch services for business across all industries.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.