Partnerships

A partnership is similar to a sole proprietorship, but more than one person forms the business. A partnership is made up of two or more individuals or business entities that come together to form a business. The most basic form of partnership is a general partnership, in which ownership of the business is divided between the individuals or business entities equally. Often, a partnership agreement is prepared to determine how the business will be run, how decisions will be made, how profits and losses will be shared, and how a partner could be removed from the business (either voluntarily or involuntarily).

A partnership is taxed similarly to a sole proprietorship; there is no separate return filed for the partnership. Rather, the partners receive a Schedule K-1 form. The form identifies each partner's portion of the business profits, which is then reflected on each partner's personal tax return. Because it is made up of more than one member, a partnership obtains a separate tax identification number (known as the employer identification number), which is used for employment purposes. However, because business income is reported on personal tax returns, personal Social Security numbers are used for some tax purposes.

Partners’ personal assets are subject to liability, but each partner shares in that liability for the business. Business insurance is key for protecting the partners’ individual assets. Forming a limited partnership can limit liability. In a limited partnership, there is at least one general partner and one or more limited partners. The limited partners' liability (personal exposure) is limited to their investment (the cash or assets they contributed to the business). In turn, these partners have limited say in how the business is run and how decisions are made. In a limited partnership, the general partner (or partners) accepts the personal liability associated with the business. Some states require  partners to file formal documents with the state in order to form a limited partnership.