Partnership Definition

What Is a Partnership?

A partnership is made up of two or more people who own a business together and share profits and losses of that business. The partners of the partnership also are jointly responsible for the business debts and liabilities.

Although it is a good idea to have a formal agreement about how the partnership will run, it is not a requirement under the Revised Uniform Partnership Act to have a formal written partnership agreement. An oral agreement will be enough to make the partnership valid. In some cases, merely carrying on a business relationship as partners will be enough to form a valid partnership.

Key Takeaways

• There are three different types of partnerships.

• Partners share in profits, losses, and liability.

• Partners should consider how the partnership will dissolve.

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Three Types of Partnerships

There are three types of partnerships. A partnership can be either:

• A general partnership;

• A limited partnership (LP); or

• A limited liability partnership (LLP).

Each type of partnership has certain requirements. You can think of them as sub-requirements or additional things that go beyond the simple definition of partnership.

In a general partnership, all partners share profits and losses and have unlimited liability for business debts and obligations. A partnership differs from a sole proprietorship mainly because the number of owners is different. As discussed, a partnership needs at least two co-owners. However, a sole proprietorship only needs a single owner. A partnership also differs from a joint venture, as a joint venture is typically an informal partnership for a certain period of time.

In a limited partnership (LP), the general partner is personally responsible for any debt that the partnership incurs. Limited partners are responsible only up to their investment in the partnership. A limited partnership is a separate legal entity from its partners and must be registered with the secretary of state.

Finally, a limited liability partnership (LLP) allows all partners to participate in management, and, depending on the state, receive limited liability protection. Like limited partnerships, they must register in the state in which they operate.

For a more in-depth comparison of the different types of partnerships, read this FindLaw article.

Partners Share in Profits, Losses, and Liability

The telltale sign of a partnership is the sharing of partnership profits and losses. It is such an important trait of a partnership, that even if the business partners do not intend to start a partnership, the partnership may be implied. This can happen when the partners share in profits and losses.

For example, if you and a friend worked together in a pet grooming business and you made a $10,000 profit each month, and each of you took home $5,000 of the profit, you and your friend have a partnership even if you did not intend to make one.

The business partners do have some personal liability for the debts of the partnership. This means that if the business owes a debt, all the partners are responsible to repay the debt, even having to use their personal assets to repay debt.

This contrasts to the liability that members of a limited liability company (LLC) could face because members of an LLC enjoy limited personal liability. This makes it unlikely that members’ personal assets are on the line to pay company debts.

Similarly, depending on the structure of the partnership, some liability protection may be available. In a limited partnership, limited partners have limited liability. Depending on the state, in a limited liability partnership, all partners may have limited liability for the debts and actions of the partnership. These types of business relationship may seem advantageous to many owners.

What Should You Consider When the Partnership Ends

Because each type of partnership has its own level of responsibility for debts, it is important that the partners know how the partnership will dissolve when and if it does dissolve.

During the period when the partnership is closing up, you and the other partners will essentially collect a list of debts. You must decide how those debts will be divided based on the type of partnership that you and the other partner or partners have created.

Internal Links

• The Small Business Partnership: General and Limited Partnerships
• Partnership Rules: FAQs
• Types of Partnerships