What is a Partnership and How Does it Work?

A business partnership is essentially a number of individuals (two or more) sharing the roles and responsibilities of the business. Typically, all decisions made and actions taken should be agreed upon by all the partners. Profits are normally shared equally among the partners, as well as any liabilities incurred and regardless of who may have been responsible for the debt. Of course, there are some variations depending on the type of Partnership Agreement: the General Partnership or the Limited Partnership.

The General Partnership Agreement is the easier of the two to form and involves two or more people jointly running the business and having a share in the profits as they are outlined in the agreement. The same applies to debts and liabilities. Every partner has an equal vote. The partnership itself is not subject to any income tax. One of the advantages to the General Partnership is that no state filing, registration, or ongoing reporting is required.

The Limited Partnership Agreement is modeled around the General Partnership except it can have one or more “limited partners” (also known as “silent partners”) who are not liable for partnership debts. All liabilities rest with one or more designated general partners. Limited partners own a share of the business but do not have any say in how the business is being run. In most states, limited partners are prohibited by law from getting involved in managerial decisions. Finally, a Limited Partnership must register itself with the respective government office in your state. A lawyer or accountant should be able to tell you the name of the government office where to register.

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