Partnership

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Partnership: Definition, Types, Taxation, Pros & Cons

Key takeaways

  • A partnership is a business arrangement in which two or more people agree to run a business and share its profits, losses, and liabilities.
  • Partnerships are typically pass-through entities for tax purposes: the business itself does not pay income tax; profits and losses flow to partners.
  • Common forms include general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs). Each differs in management rights and personal liability.
  • A written partnership agreement is essential to define profit sharing, management duties, exit rules, and dispute resolution.

What is a partnership?

A partnership is a formal arrangement by two or more individuals (or entities) to carry on a business together, sharing ownership, management responsibilities, profits, and liabilities. Partners can participate actively in operations or act as passive investors (often called “silent” or limited partners). The exact rights and obligations depend on the chosen partnership form and any written agreement.

Types of partnerships

Partnership agreements: what to include

A clear written agreement reduces conflict and provides an operational roadmap. Important provisions:
* Ownership percentages and profit/loss allocation
Management authority and voting rights
 Capital contributions and distributions
Decision-making and dispute resolution processes
 Admission, resignation, retirement, and expulsion of partners
Buy-sell terms and exit strategies
 Dissolution and winding-up procedures

Taxation

Partnerships are generally treated as pass-through entities: the partnership does not pay federal income tax at the entity level. Instead, profits and losses pass through to partners, who report them on their individual tax returns (commonly via Schedule K‑1 in the U.S.). This avoids the double taxation that can occur with C corporations, though partners remain subject to self-employment tax and other applicable rules. Tax treatment and reporting requirements vary by jurisdiction.

Advantages

  • Easier and less formal to establish than corporations.
  • Ability to pool capital, skills, and resources.
  • Shared management responsibilities and complementary expertise.
  • Potential tax advantages compared with corporate structures (no entity-level income tax).

Disadvantages

  • Personal liability for business debts in many partnership forms (especially general partners).
  • Potential for conflicts, mismanagement, or unequal commitment among partners.
  • Difficulty selling or exiting the business without clear agreement terms.
  • Complex tax and legal issues as the business grows.

How partnerships differ from other business structures

  • Liability: Partners (especially in general partnerships) often face personal exposure to business liabilities; corporate shareholders and many LLC members generally have limited liability.
  • Formation and formalities: Partnerships usually require less paperwork and fewer ongoing formalities than corporations.
  • Taxation: Partnerships are typically pass-through entities; corporations may face entity-level tax and possible double taxation of dividends.
  • Regulation: Professional rules and licensing can affect available partnership forms (for example, LLPs are common for licensed professions).

When a partnership makes sense

Partnerships suit small- to medium-sized businesses where:
* Multiple parties contribute complementary skills, capital, or client bases.
The owners want flexible management and tax pass-through treatment.
 Professionals in the same field want to pool resources while limiting exposure to others’ malpractice (using an LLP where available).

Legal and jurisdictional notes

Partnership law varies by country and state. In many U.S. states, model statutes (such as versions of the Uniform Partnership Act) influence default rules, but specifics and available partnership forms differ across jurisdictions. Always consult local law and a qualified attorney when forming a partnership.

Bottom line

A partnership is a flexible way for two or more people to run a business together, offering ease of formation and pass-through tax benefits. However, it requires careful planning—especially a detailed partnership agreement—because partners often assume significant personal liability and face potential conflicts when roles, profits, or exits are not clearly defined.