A Partnership (often called a ‘General Partnership’) is a private business entity comprised of multiple individuals formed by a partnership agreement. Profits and liability are often split among the partners equally unless otherwise indicated by this agreement.
Liability:
In most partnerships, liability for all debts and legal actions against the company is passed through to individual owners, making them all jointly and severally responsible. Partnerships are not considered a distinct entity, separate from the individuals that comprise them. In this way, partnerships are like multiple party sole proprietorships.
Note: Some States offer an entity known as an LLP (Limited Liability Partnership). In practice, this is very similar to (if not a replacement for) the Limited Liability Company.
Taxation:
Even though partnerships are “pass-through” entities when it comes to income/taxation, they are still required to file a Form 1065 partnership income tax return with the IRS. The Schedule K-1’s to this return pass the income through to the owners’ individual income tax returns through the same mechanism as with an S Corporation.
Pros:
- Less expensive to form and maintain than Corporations or LLC’s
- No required annual meetings or complex operating bylaws
- Easy way to add owners to an existing sole proprietorship operation
- ‘Pass-through’ taxation by default, prevents so called ‘double-taxation,’ as Partnerships do not pay income tax at the entity-level
- Simple way to form a multi-party business
Cons:
- Can be difficult to transfer ownership without a new partnership agreement
- Partners must pay ‘self-employment taxes’ on all pass-through income
- Personal liability passes through to all owners, even if that liability is in excess of their individual investment in the company
- Procedures governed by private partnership agreement rather than detailed State statutes and guidelines, making it difficult to obtain investment capital
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