A Partnership is exactly what it sounds like, two or more people sharing ownership and profits in a business. There are two different main types of Partnerships:
General Partnerships – all profits of the business are equally shared by each partner as a default. Through an Operating Agreement, the Partners can divide up the portions of profits each Partner will be entitled to.
Example 1: A and B enter into a General Partnership to sell widgets. Each Partner is going to be involved in the day-to-day operations. At the end of the year the widget company makes $100 in profits and each Partner is entitled to 50% of those profits. Partner A gets $50 and Partner B gets $50.
Example 2: Considering the same fact pattern in Example 1, let’s say Partner A provided all the capital when starting widget company. The two Partners agree in its widget company Operating Agreement that Partner A owns 60% of the company and Partner B would be 40% owner. Here, Partner A will be entitled to $60 at the end of the year (60% of $100) and Partner B will get $40 (40% of $100).
Limited Partnerships – a Limited Partnership shares some of the same characteristics in regards to liability as a limited liability company. The liability is generally limited to the amount to the Limited Partners investment.
A Limited Partnership does not pay taxes itself, instead the profits flow through to the individual Partners. Each Partner will report their profits on his or her personal tax returns.
One of the big disadvantages to Partnerships is the join and individual liability. Each Partner has full liability as well as shared liability among all of the Partnerships owners.
If you’re interested in learning more about the benefits and downfalls of a Partnership, check out my blog post Choosing a Business Entity.
Contact Howard Law at (314) 325-9868 for more information and deciding if a Partnership is best for your business.