Partnership | Definition, Types, Advantages, & How It Works
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A partnership is a business owned by two or more people who agree to share its profits and losses. Each partner provides labor, skills, money, or property to the business. Partnerships are among the oldest forms of business organization and are still common for small and midsize enterprises, especially among professionals such as lawyers, accountants, and real estate brokers.
How partnerships work
In a typical partnership, each general partner has authority to act for the business and is both an owner and an agent for the other partners. Decisions made within the scope of the firm’s business bind all partners, and each partner is personally liable for the firm’s debts. If one partner uses personal assets to pay a business obligation, the other partners are expected to contribute according to their ownership agreement.
Unlike corporations, partnerships are not separate legal entities in most jurisdictions. Income passes through to the partners and is taxed on their personal returns, avoiding corporate-level tax.
Types of partnerships
- General partnership (GP). All partners share management responsibilities and have unlimited personal liability for the firm’s debts. No formal filing is required in most states to create a GP—it often forms automatically when two or more people do business together.
- Limited partnership (LP). At least one general partner manages the business and has unlimited liability, while one or more limited partners contribute capital and share in profits but have liability only up to their investment. LPs must be registered with the state.
Partnership vs. corporation
Corporations are separate legal entities with limited liability for all owners and (in most cases) perpetual existence. Partnerships are legally tied to their owners, with liability and longevity depending on the partners themselves.
Some states also allow limited liability partnerships (LLPs), which extend liability protection to all partners. The partners in an LLP are typically required to be licensed, such as accountants, doctors, or lawyers. The LLP will not shield its partners in the case of negligence or malpractice.
Advantages and drawbacks
Partnerships are relatively easy to form, flexible in structure, and allow pooling of skills and capital. However, unlimited personal liability for general partners and the potential for disputes between partners can be significant risks. Partnerships may dissolve automatically if a partner withdraws or dies, unless the partnership agreement provides for continuity.
Nancy Ashburn
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