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.
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.
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.
- 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
- 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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