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.

Although it is a good idea to have a formal agreement about how the partnership will run, it is not a legal requirement 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; or
• A limited liability partnership.

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, each partner agrees that they will be personally responsible for any debt that the partnership may run-up. Liability for debts in a limited partnership is exactly how it sounds — limited.

Finally, a limited liability partnership requires at least two general partners and all partners do not take responsibility for all the debt of the partnership.

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 is a legal entity that only needs a single owner.

Partners Share in Profits, Losses, and Liability

The telltale sign of a partnership is the share 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. Meaning that if the business owes a debt, all the partners are responsible to repay the debt, and that means the partners may even have to use their personal assets to repay debt that the business owes.

This contrasts to the liability that members of a limited liability company (LLC) could face because members of an LLC enjoy limited personal liability making 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 liability partnership, a limited partner has, well, "limited" liability for the debts and actions of the partnership. A limited partner will not risk personal liability for the actions of another business partner or other business activities. This type 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