What is a Partnership?

A partnership is an incorporated business entity where multiple owners contribute their time, labor, property, or money before sharing in the company’s profits and losses.

It’s one of the most common legal structures in the country — largely due to the ease with which one can launch and register a business.

Forming partnerships can take different routes. Some partners may have limited liability while others may be silent and not be involved in daily business activities.

Before forming a partnership, you will need an Employer Identification Number (EIN). Easily file for an EIN with GovDocFiling.

File For Partnership EIN

Types of Partnerships

Partnership contracts can be express or implied; meaning that the agreement can be put on paper or inferred through conduct. They can also be between individuals, businesses, or non-profit organizations.

There are four main types of partnerships:

General partnership

General partners share both profits and losses equally and are personally responsible for liabilities if any. The terms of such partnerships are outlined in the partnership agreement.

Limited partnership (LP)

This partnership has both silent and active partners. The active business partner takes full responsibility for the business’s debts while the other is a limited partner; ie their liability is restricted by their contributions.

Limited liability partnership

These are common for professional businesses, and they limit partners from the personal liability of other partners. i.e. if one partner gets sued for malpractice, other partners are not personally liable.

Limited liability limited partnership (LLLP)

It’s a new type of partnership that works just like the limited partnership does. However, all partners are limited partners. They have personal liability protection from the business’s losses and litigations if any.

When forming a partnership agreement, you should also include dismissal terms mentioning grounds for a partner’s exclusion from the business.

Get Started With Your Application

What Are the Advantages of Forming a Partnership?

Forming a partnership comes with many advantages. Here are the main ones.

Easy to FormPartnerships can be created either formally or verbally. The only formal documentation needed is the partnership agreement, which is also optional. Filing for taxation is quite simple too.
Shared ResponsibilityUnlike in a sole proprietorship, you’ll share the burden of running the business together with your partners. They also bring with them skills and contacts giving your business a better chance of success.
More ControlUnlike in corporations, there’s minimal interference in the decision-making process of partnerships. As long as the partners agree, they can manage their affairs smoothly.
PrivacyWhen forming partnerships, the business has no obligation to share any of their documents with the public. They can keep their business affairs confidential, unlike public limited corporations.
Profit SharingPartners can easily share the profits from their businesses. This is unlike in limited companies where profits are retained and paid out either as salaries or dividends to shareholders.
Fewer Legal ObligationsPartnerships are relatively affordable to maintain. Instead of having to file both personal and corporate taxes, every partner in the business reports profits and losses as individuals.
No Double TaxationPartnerships have pass through taxation. They can avoid the “double taxation” that most corporate owners have to pay. This also simplifies tax prep since you only need to report profits and losses once.

In fact, there are no additional federal filing requirements when forming a partnership — except for the Employer Identification Number (EIN).

Apply for Partnership Tax ID

Disadvantages of Partnerships

While there are lots of advantages to forming a partnership, it also comes with some shortcomings. These include:

Not Being a Separate Legal Entity

A partnership is not a legal entity separate from its owners. Therefore, unless there are any alternative agreements in place, a partnership will be dissolved when a partner dies or resigns.

This could make the business unstable and divert the partners’ attention toward developing the business. Sometimes, even with a partnership agreement, the partnership may still get dissolved if it can’t buy the leaving partner’s share of the business

Unlimited Liability for Partners

Since the business is not a separate legal entity, partners aren’t protected from personal liability. In case the business incurs any debts or losses or encounters legal problems, the partners’ assets may be at risk.

Partners can sometimes be jointly or separately liable, depending on the type of partnership you’re in. Sometimes, one partner’s liability can affect other partners, e.g. if they’re unable to pay a debt, other partners may end up taking up part of the responsibility.

Limited Access to Capital

Partnerships give you a chance to raise more capital than sole proprietorships. However, public corporations and LLCs give you a better chance at raising capital than all other business forms, given their formal structures.

Limited liability companies and corporations have a more transparent structure and are separate legal entities. Public corporations also have financial transparency unlike partnerships, and this makes it less risky for banks and lenders to give loans.

Choosing a Partner

Forming a partnership business, running it, and maintaining it can be a difficult task given the dynamics of shared responsibility and authority. Therefore, one of the many crucial decisions you need to make as a business owner before forming a partnership is choosing the right partners.

Here are factors you need to consider before bringing them on.

Personal Assets: If your partners own less than you in personal assets, you may have to give up more in the event that your company incurs a huge debt.

Personality: You’ll need to have an understanding with your partners so you can resolve disputes, and make better decisions for your business.

Business Goals: You’ll need to know if your partners share the same vision for your business as you or if they’re just looking for income.

Responsibilities: When choosing your partners, you’ll need to know how much time they contribute to the business and how reliable they are.

Roles: You’ll need to outline which roles you intend individual partners to take up in the business. The roles need to be aligned with each partner’s skills.

A partner should contribute to the business both in assets and expertise.

Get Started With Your Application

Rights and Responsibilities of Partners

The general rights and responsibilities that come with forming a partnership are outlined in the Uniform Partnerships Act. The partnership agreement may alter some of these, with the exception, typically, of laws governing the partners’ interactions with third parties.

Partner Rights

Some general partner rights include:

  • Partners who contribute to the business financially ought to be repaid with interest.
  • Partners have equal access and rights to property held in the name of the business.
  • Partners have an equal share in profits and losses unless stated otherwise.
  • All partners have equal say in the management and business decision-making.
  • All partners can access the business’s accounting records and financial activities.
  • Addition of new partners must be consented to by all the partners.

Partner Rights
Partner Responsibilities

Partner Responsibilities

The responsibilities include:

  • Income received from the partnership’s assets must be disclosed and paid back.
  • Each partner must dedicate their skills, time, and effort to grow the partnership.
  • A majority vote must be obtained to settle any disagreements.
  • It is forbidden for partners to run a business that competes with the partnership.
  • Any assets a partner obtains for the partnership must be given to the partnership.

Frequently Asked Questions

Some considerations when forming a partnership are:

  • Choosing your partners and the type of partnership
  • Naming your partnership business
  • Drafting a partnership agreement
  • Knowing your tax obligations and getting an EIN
  • Registering your partnership with the state
  • Getting other relevant licenses and permits

All partnerships are required by US law to submit Form 1065 to the IRS every year if there was any income earned.

If your business has not made an income that taxable in your first years, then you won’t need to file federal returns.

Registering partnerships is optional, and the partners get to decide whether to register their business.

The penalty for not filing tax returns on time is 20% of the tax charged.