What Is A Partnership?

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What Is A Partnership: Defined

A partnership is a business where two or more people share in ownership and are called “partners” or “members.” Each partner contributes to all aspects of the business, including money, property, labor, and skill. In return, each partner shares in the profits and losses of the business.

To form partnerships, the business must be registered with the state. The partnership’s legal name can be used to conduct business or a DBA can be filed to conduct business.

Partnerships is governed by its partnership agreement. For example, one partner might provide the financial backing for the business, and another partner might provide a special skill. Partnerships gains and losses are split among the partners according to the partnerships agreement. The agreement may provide that an older, financially established member who funds the business is entitled to a greater percent of the partnerships gains, while a younger partner who provides the labor for the enterprise would be entitled to a somewhat smaller percent of partnerships gains. In the event of a business loss, the partners share the loss in the same proportion as the partnerships agreement provides.

What Is A Partnership: Taxes And Partnerships

The partnerships itself is not a taxable entity. Instead, the business “passes through” any profits or losses to its partners. Partners include their respective shares of the partnership’s income or loss on their personal tax returns and pay taxes at their individual tax rate.

The partnerships must report its profit or loss on IRS Form 1065 and each partner’s share of the profit or loss on IRS Schedule K-1. Each partner then uses this information to report his or her share of the partnership’s net profit or loss (and any special deductions and credits) on his or her IRS Form 1040, Schedule E. However, the partnership itself does not pay any tax on the partnership’s income.

What Is A Partnership: Types Of Partnerships

There are two types of partnerships: general partnerships and limited partnerships. In a general partnership, each partner is responsible for running the business and is personally liable for the business’s debts. A general partnership also dissolves immediately upon the death, withdrawal, insanity, or insolvency of any of the partners. In a limited partnership, a limited partner has limited decision-making ability and his or her liability is limited to the amount he or she invested in the business. A limited partnership will have at least one general partner who manages the business and is personally liable for the business’s debts. Unlike a general partnership, a limited partnership does not dissolve upon the death, withdrawal, insanity, or insolvency of a limited partner.

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