Business Partnership Definition

A business partnership is exactly what it sounds like: a business that is owned by two or more people. In this type of entity, each business partner shares in the company’s profits and losses. 

Partnership Definition in Business

As we already mentioned, a business partnership is a business that is owned by two or more people or companies. Each business partner invests their own money into the business, and shares in the company’s profits and losses. 

Forming a Business Partnership

Partnerships typically must register with the state in which they are formed/do business. The regulations for how to form a partnership and what types are an option vary from state to state. Check with your Secretary of State to make sure you follow the rules for your area. 

If you’re forming a general partnership, the steps typically include:

1. Choosing a business name
2. Drafting and signing a partnership agreement
3. Getting an Employer Identification Number (EIN)
4. Securing licenses and permits
5. Opening a business bank account

Learn more about forming a business partnership.

Types of Business Partnerships and How They Work

The way a business partnership works depends on what type of partnership it is. There are three basic types of business partnerships. They include: 

• General partnership (GP)
• Limited partnership (LP) 
• Limited liability partnership (LLP)

General Partnership

A general partnership (GP) is one in which the partners work in the business and are heavily involved in day-to-day company management and business decisions. In this structure, partners are liable for business debts and lawsuits brought against your business.

Limited Partnership (LP)

In a limited partnership, one or more partners are responsible for managing the company and have liability for business debts and lawsuits, while the other partners aren’t involved in business operations and don’t have liability for debts and lawsuits. 

Limited Liability Partnership (LLP)

Finally, a limited liability partnership protects all partners from the actions or debts of the other partners in their business. This structure is often selected by professionals in the fields of accounting, law, healthcare/medicine, and architecture.

Note: While a limited liability partnership provides liability protection from the actions or debts of your partners, it does not protect you from liability for your own actions, or lawsuits brought against you. 

Different Kinds of Partners

Different types of business partnerships may have different levels of partnership participation and hierarchies. This means that partnerships can have several different types of partners within one partnership.

Examples of the different kinds of partner roles you can create include:

General Partners

General partners participate in the operations and management of your business within the partnership. They also have personal liability for the business’s debts.

Limited Partners

Limited partners invest, often financially only, in the business. However, they don’t usually participate in the daily management and running of the company.

Equity Partners

Equity partners have a share of ownership in the overall partnership and its business assets.

Salaried Partners

Salaried partners are also treated as employees and may or may not have ownership shares.

Junior and Senior Partners 

Junior and senior partners are different levels of partnership roles. Each of these partnership types has different duties, levels of management input, responsibilities, and financial investment commitments.

Taxes

Unlike corporations, partnerships are not separate entities from their owners for tax purposes. 

At tax time, partnerships file a Form 1065 with the IRS, also known as an information return. Taxes are not paid by the partnership itself. Instead, each partner reports their share of the company’s profits and losses on their own individual tax return. This means partnerships are treated as pass-through entities. 

Partners receive a Schedule K-1 which shows their business tax liability from the previous year. The K-1 will be included with each partner’s additional income on their individual tax return. 

Advantages of Business Partnerships

There are several advantages to forming a business partnership. 

Flexibility

Most types of partnerships are easy to form, manage, and run. They often have fewer restrictions and regulations than corporations and other types of business structures. Partnerships do not have to conform to specific business structure laws because the partners involved create their own laws and rules about how the business will be managed. Management is also more flexible and simply needs to abide by the partnership agreement.

Financial Growth

Most startup partnerships are funded by the individual partners’ investments in the business. The more partners involved,  the greater the startup funding. This allows for more financial growth and working capital. It can also lead to bigger marketing budgets, resulting in even higher profits.

Borrowing Capacity

The combination of each partners’ credit scores and assets also gives new partnerships better borrowing capacity to acquire funding. 

Tax Savings

The income splitting and pass-through of business losses for partnerships can help offset high tax brackets for many individuals.

Shared Responsibility and decision-making

Multiple partners share in the daily operations of the company. This allows each person to bring their best abilities to the business’s success. Smart partnerships split the management responsibilities according to each person’s skills and aptitudes. If you’re good with accounting, you should handle the bookkeeping and reporting. A partner who is good with sales might serve as the sales director.

You and your partners will share the decision-making process, which will help to make better decisions in difficult business circumstances. Having many expert minds means greater access to smart business ideas and problem-solving expertise.

Privacy

You and your business partners’ affairs are kept private because you do not have to file the required annual financial statements that corporations must.

Disadvantages of Business Partnerships

With all the pros of a business partnership, there are also some cons and potential pitfalls. They include:

Legal Liability Risk and Debt Responsibility

Partners who are not part of an LLC or are specifically limited partners will be at risk for the liability of all business debts and court judgments.

Most partnership agreements also include the stipulation that each partner is jointly and severally (which means equally) liable for the debts of the partnership. This means that each person is liable and responsible for their divisible share of the business debts and also liable for all the debts as a total.

Disagreements

The risk of friction among partners over financial and business matters can be a major disadvantage of partnerships. The best way to avoid this risk is to write a detailed partnership agreement stipulating everyone’s agreement over roles, responsibilities, business management, and financial investments.

Negative, Illegal, or Fraudulent Partner Actions

Your partners’ actions can reflect on you from both a liability and reputation-based standpoint. That’s why it’s important to only go into business with people or business entities that you trust and that offer full transparency. 

Partners Leaving and Joining

If a partner leaves or joins the partnership, the business and partnership assets must be revalued redistributed. This can be costly and time-consuming.

Summary

In summary, partnerships are business entities that are owned by two or more people. There are three distinct types of partnerships: 

• General partnerships
• Limited partnerships
• Limited liability partnerships

Within each of these structures, you also have the option of appointing several different kinds of partners who play a varying degree of roles within your company operations. 

For tax purposes, partnerships are treated as pass-through entities, in which each partner reports their share of company profits and losses on their individual tax return. 

Finally, like other business structures, partnerships offer many advantages as well as a few disadvantages. The advantages of a business partnership generally include: 

• Flexibility
• Financial growth
• Borrowing capacity
• Tax savings
• Shared responsibility and decision-making
• Privacy

Meanwhile, the disadvantages of a partnership are often:

• Legal liability risk and debt responsibility
• Disagreements
• Partner actions affecting you
• Partners leaving and joining

We Can Help

Remember, if you have any questions or needs surrounding starting a business, we can help. From our business formation services to worry-free compliance, we’ve got you covered. Reach out to us today. We can’t wait to help you start, run, and grow your dream business!