What is a Partnership?
A partnership is the relationship between two or more people to do trade or business. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business.
The partnership is a separate legal entity from the partners, but the partners have liability for the actions of the partnership in most cases. This arrangement differs from a corporation, which is separate from its owners with regard to liability.
Reporting Partnership Income
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” profits or losses to its partners. Each partner reports their share of the partnership’s income or loss on their personal tax return.
Partners are not employees and shouldn’t be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partner.They take money from the business as distributive shares, not as salaries.
Types of Partnerships
The four typical types of partnerships are a general partnership, limited partnership, limited liability partnership (LLP) or joint venture. Below are basic summaries of these main types of business partnerships.
| General Partnership | Limited Partnership | Limited Liability Partnership | Joint Venture |
| A General Partnership is a form of business entity in which two or more co-owners engage in business for profit. For the most part, the partners own the business assets together and are personally liable for business debts. | In a Limited Partnership, one or more “general” partners manage the business while “limited” partners contribute capital and share in the profits, but take no part in running the business. General partners remain personally liable for partnership debts while limited partners incur no liability for partnership obligations beyond their capital contributions. The purpose of this form of business is to urge investors to invest without risking more than the capital they have contributed. | Also known as an LLP is essentially a General Partnership but each partner is not liable for certain acts of other partners. This formation is a General Partnership that elects to be treated as an LLP by registering with the Secretary of State. Many attorneys and accountants find the LLP a very attractive alternative since it shields the partners from vicarious liability, can operate more informally and flexibly than a corporation, and is given full partnership tax treatment. In California, with certain exceptions, the LLP is only available to attorneys and accountants. | A joint venture is a cooperative arrangement between two or more business entities, often for the purpose of starting a new business activity. Each entity contributes assets to the joint venture and agrees on how to divide up income and expenses. |
Forming a LLP
The partnership must register specifically as an LLP, filing a form as a “limited liability partnership” or a similar type of declaration. The partnership should also create a partnership to spell out how the partnership will be run and what happens in various circumstances.
Limited Liability Partnerships vs. Other Partnerships
An LLP differs from a general partnership or a limited partnership in that all partners are shielded from the wrongful acts or negligence of other partners in an LLP.
An LLP combines characteristics of partnerships and corporations, particularly in the area of limited liability. A partnership typically doesn’t provide its individual partners with limited liability from lawsuits and debts. But all partners have limited liability from errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees in the LLP form, just as in a corporation.
Many professionals form LLPs because it protects them from being involved in a malpractice lawsuit against another partner, at least to some degree.
Don’t confuse an LLP with a limited partnership. A limited partnership is a type of partnership with both general partners and limited partners.
The most obvious difference between an LLP and a (LLC) is that the owners of an LLP are partners. The owners of an LLC are referred to as “members.”
Liability of owners is the biggest difference between an LLP and an LLC. Partners in an LLP are not typically liable for the debts or negligent acts of other partners, whereas liability of members of an LLC is limited to each member’s contribution. It doesn’t consider the liability of other members or of the LLC as a whole.
Wrongdoing or negligence outside the scope of the owner’s duties doesn’t have liability protection in either type of business. Some examples would be if an owner sexually harasses an employee or client, steals from the company, or physically assaults someone.
LLC members can decide between member management and hired management, while partners in an LLP manage the partnership themselves. All partners have the same general management responsibilities in an LLP. The flexibility of management isn’t the same as with an LLC because an LLP is a partnership.
An LLC has several tax options. It can be taxed as a corporation or as an S corporation. An LLP can only be taxed as a partnership.
| Bundle | Standard $179.00 + State fees (CA: $70.00) | ||
| Entity Name Availability Check We’ll perform the search to see if your proposed name is allowed and available. | X | ||
| Entity Name Reservation Calendar expiration of name for 60 days | X | ||
| Prepare Articles of Incorporation or sometimes called a Certificate of Organization | X | ||
| Filing Complete documentation and file it with the state | X | ||