A partnership is a form of business organization where two or more people agree to share in the profits and losses of a single business. The partnership must register with the secretary of state, establish a business name, register with the IRS and local and/or state revenue agencies, file for a taxpayer identification number and file annual reports for the partnership with the secretary of state. While not required, a partnership agreement is generally entered as well to specify the rights, duties and obligations of the partners. While the partnership itself does not pay any tax and passes its income, losses and deductions to its partners, usually through a Form K-1, it still must file an informational tax return with the IRS (Form 1065). There are two main types of partnerships, general partnerships and limited partnerships.
In a general partnership, the partners manage the company and assume responsibility partnerships debts and obligations. Unless otherwise clearly stated in a partnership agreement, profits, liabilities and management rights are presumed to be equal amongst all partners. A limited partnership is more complex. There are both general partners, and limited partners. The general partners own, operate and assume the liabilities of the partnership, the limited partners serve as passive investors and have no control over the company. The limited partners are also not subject to the same liabilities as the general partners. Note that each general partner is personally liable for the financial obligations of the business and each general partner can act on behalf of the partnership (subject to restrictions in the partnership agreement). This means that general partners may be personally liable for loans and business decisions that were made by their partners without their input. The partnership agreement is an extremely important document, and care must be taken to address all important issues such as: (1) what is each partner’s investment; (2) how will profits and losses among partners be shared; (3) what are the responsibilities and duties of each partner; (4) what happens if a partner becomes disabled; (4) what happens if a partner dies or wants to exit the partnership; and (5) what restrictions do the partners want to place on the transfer of partnership interests.