• Understand the difference between general and limited partnerships
• Understand the advantages and disadvantages of partnerships
• Understand the advantages and disadvantages of a limited liability partnership (LLP)

Forming a Partnership

Because partnerships involve more than one person in the decision-making process, it’s important to discuss a wide variety of issues before starting the business and document your expectations in a legal partnership agreement. This agreement should state how future business decisions will be made, how the partners will divide profits, how to resolve disputes, whether to allow changes in ownership (bring in new partners or buy out current partners), and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended, and it’s extremely risky to operate without one.

Registering the Partnership

To form a partnership, you must register your business with your state, a process generally handled through your Secretary of State’s office. You’ll also need to establish your business name. For partnerships, your legal name is the name given in your partnership agreement. If you choose to operate under a name different from the officially registered name, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for “doing business as”). Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state, and locality.

Most businesses will need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit. An additional requirement for partnerships is that they must file an “annual information return” to report the income, deductions, gains, and losses from the business’ operations. However, the business itself does not pay income tax. Instead, the business “passes through” any profits or losses to its partners. Partners include their respective share of the partnership’s income or loss on their personal tax returns. Like sole proprietors, partners in the partnership are responsible for several additional taxes, including income tax, self-employment tax, and estimated tax. Since partnerships can be complex, having a professional to advise the partnership and partners on tax matters is very important.

Types of Partnerships        

There are two general types of partnership arrangements:

general partnerships

General Partnerships usually divide profits, liability, and management duties equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.

limited partnerships

Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects.