In essence, a partnership consists of 2 or more people (or entities) doing business together for profit. They say, “Two heads are better than one,” so partnering up with someone else can be a great idea in many ways. You can share ideas, split the workload, and split the costs associated with running your business. The downside is that you have to split the profits with someone else as well. Additionally, if you don't get along with your partner, or your partner is irresponsible, it can be disastrous for you and your business. But by picking someone who shares your business philosophy and goals, and planning ahead, you can prevent many of the problems that partners run into.
For tax purposes, the partnership itself is not taxed, but rather, the profits and losses “pass through” to the partners and they are subsequently taxed on their individual tax returns.
The basic and default form of partnership is called a general partnership. Profits and losses are shared equally, as are management rights and responsibilities, including the ability to incur business liabilities for the partnership. Each partner is also personally liable in equal measure for partnership debts and obligations. Most partnerships decide to modify these default terms by agreement.
Other types of partnerships include the following:
Limited Partnership (LP)
In a limited partnership, there are 2 classes of partner: general partner and limited partner. There must be at least one of each. The general partner is responsible for running the business, while limited partners do not partake in management. The general partner is personally liable for the debts and obligations of the business, but limited partners are only liable to the extent of their investment.
Limited Liability Partnership (LLP)
In a LLP, all partners have the benefit of limited liability, but are allowed to participate in the management of the business. In California, this type of partnership structure is only available to accountants, lawyers, and architects.
Limited Liability Limited Partnership (LLLP)
A LLLP is similar to a LP, except that here, even the general partners receive limited liability protection. LLLP's cannot be formed in California, but out-of-state LLLP's can do business here if they are registered with the Secretary of State.
The above partnership types have many similarities, such as filing requirements and tax treatment. The main differences are found in the liability protections and rights of the partners. Which type is best will depend on your business goals. Regardless of the type of partnership, the role of each partner should be spelled out in a written partnership agreement.
Helix Law Firm can help you form a partnership
If you're thinking about going into business with someone else, a partnership might be the ideal structure for you. If so, Helix Law Firm can advise you on the best partnership structure, help you draft a solid partnership agreement, and provide ongoing legal support.