Definition

A partnership is an arrangement where parties, known as partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations. Organizations may partner to increase the likelihood of each achieving their mission and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a contract.

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Partnership

What is a 'Partnership'

A partnership is an arrangement in which two or more individuals share the profits and liabilities of a business venture. Various arrangements are possible: all partners might share liabilities and profits equally, or some partners may have limited liability. Not every partner is necessarily involved in the management and day-to-day operations of the venture. In some jurisdictions, partnerships enjoy favorable tax treatment relative to corporations. 

Explaining 'Partnership'

In a broad sense, a partnership is any cooperative endeavor undertaken by multiple parties. These parties can be governments, non-profits, businesses, individuals, or a combination, and the goals of the partnership can vary widely. There may or may not be a written agreement governing the partnership, but it is generally a good idea to lay out specific terms at the outset, so that disagreements can be settled according to predetermined rules. In some cases such an agreement is legally required.

Legal Treatment

The basic arrangements described above (with the exception of LLLPs) are widespread in common law jurisdictions such as the United States, Britain and the Commonwealth. There are, however, differences between the laws in these jurisdictions, and individuals looking to found a partnership should seek professional legal advice. In the U.S., each state has its own laws governing partnerships. There is no federal statute that defines the various forms of partnership, but the a majority of states have adopted one form or another of the Uniform Partnership Act, which has undergone a number of revision between 1914 and 1997.

Tax Treatment

While there is no federal statute defining partnerships in the U.S., the Internal Revenue Code (chapter 1 subchapter K) includes detailed rules on federal tax treatment. Partnerships do not pay income tax; it passes through to the partners. Partners are not considered employees for tax purposes. Individuals in partnerships may receive more favorable tax treatment than if they had founded a corporation; corporate profits are taxed, as are the dividends paid to owners. Partnerships' profits, on the other hand, are not double taxed in this way.

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Further Reading

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