Takeaways
- A partnership is a structure that allows two or more people to own a business.
- Members in a general partnership share in the profits and losses of the business.
- Partnerships can have up to 100 partners, but most contain only two members.
- There are three main types of partnerships: general, limited, and limited liability.
- Small businesses like private practices for doctors, lawyers, dentists, and accounting firms use partnerships.
What Is a Partnership?
A partnership is a simple structure that allows two or more people to own a business together. Each partner manages the company, contributes to ongoing operations, or funds it. Partners receive a share of the business's profits and losses.
Even though over 50% of partnerships are just two persons, a partnership is not limited to two people.[1] Although partnerships require a minimum of two people, partnerships can extend up to 100 people or more, depending on the type of business they are running.[2]
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How a Partnership Works
Unlike corporations, a partnership is not a legal person but a business structure. Partnerships are simply formal business arrangements between two or more people to carry out a business to create a profit.[3]
Partnerships typically form when two or more professionals want to consolidate their efforts to build a book of business or client base and centralize operations. Partnerships are a cost-efficient way for prospective owners to test a business idea before taking on a more expensive structure like a Limited Liability Company or C Corporation.
Some partnership structures are more well-suited for law firms, accounting practices, and other professional services. Below, we examine different partnership structures you can consider, depending on your business idea.
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Three Types of Partnerships
There are three main types of partnerships: general, limited, and limited liability. Here, we examine each one:
General Partnership
General Partnership (GP) is the most straightforward type of partnership. All partners share equally in management and share in unlimited personal liability for the business's debts. If the business cannot pay its debts, creditors can go after the personal assets of any partner.
In general partnerships, partners are actively involved in the day-to-day operations, and profits are typically split equally unless otherwise stated.
- Best For: Starting a business quickly
- Advantages: No state filing fees are required, low operational costs
Limited Partnership
A Limited Partnership (LP) offers different partnership levels between general and limited partners. General partners manage the business and have unlimited liability, while limited partners contribute financially but do not participate in management. Limited partners are sometimes called "silent partners."
Silent partners' liability is restricted to the amount they invest (e.g., investing in stocks, bonds, or real estate). This structure allows limited partners to invest without taking on the same level of risk as general partners. Only general partners control daily operations, which can sometimes be a downside for silent partners who want to be more involved or have influence.
- Best For: Business run by a general partner who needs limited partner capital
- Advantages: The amount of liability for silent partners is limited to their investment
Limited Liability Partnership
A Limited Liability Partnership (LLP) is typical for professional organizations like law firms or accounting practices. In an LLP, all partners enjoy limited liability protection, meaning they are not personally responsible for the negligence or malpractice of other partners.
Each partner's personal assets are generally protected from the partnership's debts and liabilities. However, the exact level of protection can vary by jurisdiction. An LLP allows all partners to be actively involved in managing the business, making it a flexible structure.
- Best For: Professional service firms
- Advantages: Personal assets of partners are shielded from satisfying business debts
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How to Form a Partnership
If you have a business idea for a partnership, you first need to choose a name to form a partnership. You will want to verify that your chosen name is unique and not similar to other businesses or trademarks. You can do this by checking state and federal databases.
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After you choose and file your name with your state's Secretary of State, consider drafting a partnership agreement. While this step is not legally required, it is best to set clear outlines and expectations for all partners. In a partnership, you want all parties to understand the scope of their responsibilities, roles, and investment expectations. You can even include voting rules for decision-making, profit splits, and what each partner expects to contribute.
Partnerships must comply with all state and tax regulations. This typically includes applying for an Employee Identification Number, business license, and state tax registration. Additionally, partners can get business insurance to protect their business and assets. Since a partnership does not extend liability protection, business insurance provides protection in case of a lawsuit.
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Pros of a Partnership
- Shared risk and responsibility: Having more than one person in charge helps share the burden of decision-making, day-to-day operations, and financial risk.
- Tax benefits: Partnerships are pass-through entities (like S Corporations), meaning they do not pay income taxes. Instead, the partners pay individual income tax based on the profits each one receives. (Read more about the 2024-2025 Tax Rates and Brackets.)
- Increased capital: Having multiple business owners can mean more capital to start and run the business. (Read about the 9 Ways to Fund Your Startup).
- Divide and conquer: Well-structured partnerships are formed when each partner brings a unique skill set and strength to the business. Multidisciplinary partnerships allow people to work on the parts of the business they are best qualified to run.
Cons of a Partnership
- Responsible for Business Liabilities: A partnership does not offer any liability protection, putting each partner at financial risk if the business is sued.
- Potential Conflict: Even the best-intentioned partners will have disagreements. Conflict can arise and be challenging to resolve, especially if there is no agreement on how the partnership will resolve internal disputes. Nearly 70% of partnerships fail or dissolve.[4]
- Shared profits: When you have a partnership, partners must share in the business's profits (even if one partner brings in all the business). If you are a sole proprietorship or single-member LLC, you alone can reap the rewards of your business’ profits.
- Exiting complications: Partnerships can be complicated if one person wants to sell and others do not. If a partner dies, there can also be complications with how the business proceeds. Legal structures like a C Corporation can live on in perpetuity, with owners and managers changing frequently.
Partnership vs. LLC
One of the most significant differences between a partnership and an LLC is how each entity is formed. Partnerships can be formed with an oral or written agreement.
LLC's are created by filing with the Secretary of State's office where the business is located. LLCs also offer liability protection for owners in case of creditors or a lawsuit. LLCs are also corporations.
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Smart Summary
A partnership can offer a simple way to create a business between two or more people. This type of agreement is a low-cost option compared to other business structures. While general partnerships are easy to start, they do not offer any liability protection to partners. If you are trying to start a business, a partnership structure might make a ton of sense. Explore other legal business structures to see what best suits your current and future business needs.
(1) Internal Revenue Service. Partnership Returns, Tax Year 2021. Last Accessed January 12, 2025.
(2) Ezy Legal. Understanding the Maximum No. of Partners in a Partnership Firm. Last Accessed January 12, 2025.
(3) DLA Piper. Partnerships: what, how, and when. Last Accessed January 12, 2025.
(4) Buford Perry. Tips for Ending a Business Partnership. Last Accessed January 12, 2025.
