{"id":4857,"date":"2016-04-04T10:47:45","date_gmt":"2016-04-04T15:47:45","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/partnerships.html"},"modified":"2025-10-25T08:10:00","modified_gmt":"2025-10-25T13:10:00","slug":"partnerships","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/partnerships.html","title":{"rendered":"Partnership Business Law"},"content":{"rendered":"\n
\n

Partnership Business Law<\/h1>\n\n
\n
\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
\n

Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

\n

A partnership is a type of business<\/span> entity where two or more owners work together and share in the business\u2019s profits and debts. Depending on the partnership structure<\/span>, a partner may have limited personal liability<\/span>.<\/p>\n\n <\/div>\n\n\n\n

When entrepreneurs decide to start a new business, they face a big choice: what type of <\/span>business<\/span> structure<\/span> to use. They can pick from structures like sole proprietorships<\/span>, a limited liability company<\/span> (LLC), or different types of partnerships<\/span>.<\/p>\n

This guide helps you understand partnerships and how they work.<\/p>\n

Need help with business formation? Our trusted partner LegalZoom makes it easy\u2014packages start at $0 + state filing fees.<\/a><\/b><\/em><\/p>\n

What Is a Partnership?<\/h2>\n

A partnership is a type of business<\/span> entity. In this type of entity, two or more business owners<\/span> work together. A partnership often shares decision-making and managing business operations among the partners. All partners share<\/span> the business debts and profits.<\/p>\n

General partnerships<\/span> can be simple, even with a verbal agreement. However, partnerships usually don\u2019t protect partners from liability<\/a>. This is a major distinction between partnerships and other types of business<\/span> entities.<\/p>\n

Additionally, you may consider drafting a partnership agreement<\/span> outlining each partner\u2019s rights and responsibilities. This helps define roles and provide a mechanism for dispute resolution<\/span>.<\/p>\n

Partnership Taxes<\/h2>\n

Partnerships do not pay taxes as a business entity. Instead, the profits or losses pass through to the individual partners<\/span>. This is a way to avoid double taxation, where both the business and the individual get taxed. The government simply taxes the profits that flow to individual partners<\/span> as personal income.<\/p>\n

The partnership files\u00a0Form 1065<\/a>, U.S. Return of Partnership Income with the IRS<\/span> and provides each partner with a Schedule K-1<\/a>, with their share of the business profits. The partners then pay taxes on their personal 1040 tax returns<\/span> which include their partnership profits.<\/p>\n

To learn more about partnership taxes, visit\u00a0FindLaw\u2019s Partnership Taxes<\/a>\u00a0page.<\/p>\n

Buy-Sell Agreements: Planning for the Future<\/h2>\n

Planning ahead is key in partnerships. Also referred to as “business continuation agreements” or “buyout agreements,” a\u00a0buy-sell agreement<\/a>\u00a0is a contract. This contract provides for the possible future sale of your business interest or purchasing your co-owner<\/span>\u2019s interest.<\/p>\n

One reason partners tend to enter into a buy-sell\u00a0agreement is due to concerns about the health of one partner. If a co-partner dies, it will affect the operation of the business<\/span>. A fully-funded buy-sell\u00a0agreement can help eliminate any doubts about the future of your company.<\/p>\n

General Partnerships<\/span><\/h2>\n

A general partnership<\/span> is the simplest business structure<\/span>. Business owners<\/span> have unlimited liability<\/span>. This means that their personal assets<\/span> might pay for business debts. Every partner has a say in day-to-day<\/span> operations<\/span>. They share in both profits and losses. But be careful! If one partner makes a mistake, all partners face personal liability<\/span> for the actions of other partners<\/span>.<\/p>\n

Limited Partnerships<\/h2>\n

Limited partnerships<\/a>\u00a0have two types of partners: general and limited partners<\/span>. General partners<\/span> manage the business and face unlimited liability<\/span>. They handle the day-to-day<\/span> operations<\/span> of the business<\/span>. Limited partners<\/span>, in contrast, are silent partners<\/span>. These silent partners<\/span> invest money but do not manage day-to-day<\/span> operations<\/span>. They have limited liability, which protects their personal assets<\/span> more than general partners<\/span>.<\/p>\n

Limited Liability Partnership<\/span><\/h2>\n

A\u00a0limited liability partnership<\/span><\/a>\u00a0(LLP<\/span>) is popular among professionals like lawyers. This is because of malpractice concerns. In an LLP<\/span>, all partners get liability protection<\/span>. This means their personal assets<\/span> have better protection from business debts and actions of other partners<\/span>. They still share in the decision-making and business operations.<\/p>\n

Limited Liability Limited Partnership<\/span><\/h2>\n

A\u00a0limited liability limited partnership<\/span><\/a>\u00a0(LLLP<\/span>) offers even more protection. While it\u2019s a newer business entity, it gives business owners<\/span> the benefits of limited liability for all partners. In an LLLP<\/span>, the partners avoid double taxation. Not all states offer LLLP<\/span> formation.<\/p>\n

Joint Ventures<\/span><\/h2>\n

Joint ventures<\/span><\/a>\u00a0are a special type of business<\/span> partnership<\/span>. They\u2019re formed when two or more businesses come together for a specific business activity or project. Unlike other partnerships, joint ventures<\/span> have a set time frame. They are not always permanent. For instance, two companies might form a joint venture<\/span> to develop a new product. Once the product is launched and the goal is achieved, the joint venture<\/span> might end.<\/p>\n

Special Allocations<\/h2>\n

In a normal business arrangement, income, gains, losses, deductions, and credits are distributed according to each business partner<\/span>\u2019s or member\u2019s ownership percentage. However, when the partners set up a\u00a0special allocation<\/a>,\u00a0income and expenses are redistributed according to the allocation or agreement. Keep in mind that IRS<\/span> rules must be followed if you want to divide profits and losses in a way that\u2019s disproportionate to the owners\u2019 interests in the business.<\/p>\n

Hiring a Business Lawyer for Your Partnership<\/h2>\n

Partnership rules and regulations can be extremely complicated. If you want to set up a special allocation, you\u2019ll need expert help to make sure that your allocation will comply with IRS<\/span> rules.<\/p>\n

A business lawyer can draft special language for your partnership agreement<\/span> or operating agreement to ensure that the IRS<\/span> will accept your special allocation. An attorney specializing in partnerships can help you formulate your buy-sell agreement and even help reduce your tax liability<\/span> for the future.<\/p>\n

Speak to an\u00a0experienced\u00a0business lawyer<\/a>\u00a0about your partnership today.<\/p>\n\n\n

\n \n Was this helpful?<\/span>\n \n Yes<\/span>\n \n \n \n <\/path>\n <\/g>\n \n \n <\/rect>\n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n \n No<\/span>\n \n \n \n \n <\/g>\n \n \n \n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n <\/div>\n <\/span>\n