A partnership is an unincorporated business owned and operated by two or more individuals.
In a partnership, all profits and losses pass through to partners and are reported on their individual tax returns. The partnership is not considered a separate entity for tax purposes and, as such, is not taxed. As a rule, partners share liability for all debts of the partnership and the outcome of its actions.
There are three main types of partnership business structures. In a general partnership, all labor, profits and liabilities are normally shared equally among partners; if a different arrangement is desired, the details should be documented in a legally-binding agreement signed by all partners. A limited partnership can protect the private assets of partners and restrict partner input on business decisions. A joint venture is a special-purpose temporary version of the general partnership.
The U.S. Small Business Administration strongly recommends that partnerships draft agreements whose stipulations should include:
- How profits, labor and liabilities will be divided among partners.
- How future business decisions will be made.
- How disputes will be resolved.
- How partners will be brought in or bought out.
- How the partnership will be dissolved.