A partnership is typically an association of two or more people that operate as the co-owners of a business that has not been registered as an LLC (limited liability company) or a corporation. Depending up on its structural framework and business model, a partnership may be classified as general or limited. Let’s have a look at the partnership basics that define the structure of this simple and inexpensive business model.
- The first and most important aspect of a partnership business is to understand the difference between a limited partnership and a general partnership. In a general partnership, all the individual partners are personally liable for all of the obligations, debts and court judgments associated with the business. In a limited partnership, however, the limited partners have limited liability while the general partners are liable for all of the obligations, debts and court judgments associated with the business.
- A partnership business is not a separate entity when it comes to tax liability. In other words, the business will itself not pay any taxes on the profits generated. Instead, it is the partners who will have to pay the taxes on their share of the business income that they receive. Regardless, the partnership is required to file an informational return via the IRS Form 1065 every year.
- Although you do not have to perform any extensive paperwork to get started, your partnership must comply with the local registration regulations of your city. Depending on the type of business you are involved in, getting a seller’s license, a fictitious business name, a zoning permit and an employer identification number are just a few of the formalities that you might need to fulfill when creating a partnership.
- Technically, when a partner decides to quit the business, the partnership automatically stands dissolved. However, it is possible to avoid this technicality with the proper structure in place. For example, you might want to have a buy-out or buy-sell agreement in place that provides instructions on dealing with a partner’s demise, retirement or decision to quit.