Partnerships are formed when two or more people agree to operate a business together. Commonly found in the wholesale and retail trades, partnerships are also a popular form of business organization in the financial service industry and other professions.
Profits are a result of the partners' combined efforts, and are divided among them, not just given to one person. Generally, partnerships succeed only when all the partners contribute. That may explain why this is the least common form of business organization, and why so many partnerships dissolve over internal conflicts.
There are two types of partnerships:
- General partnerships — In a general partnership, each partner contributes capital to the business, either in the form of money or services, and participates in managing the company. Each partner is liable for the full amount of partnership indebtedness to the extent of his or her business and personal assets.
- Limited partnerships — A limited partnership is made up of general and limited partners. Limited partners contribute only capital to the business, but do not participate in managing the company. Their liability is limited to their investments in the business; their personal assets are not available to the creditors of the partnership.
Our discussion deals with general partnerships.
General Partnership Characteristics
- Each partner has an ownership interest in the business; the sum of the partners' interests equal 100 percent.
- Partnership interests are often equal (three partners with 33 1/3 percent interest each, for example), but this is not always the case.
- A partnership should be based on a written agreement, drawn by an attorney.
- Partnership assets may be owned in the business name; however, partners are individually liable for the debts of the business to the full extent of their personal assets.
- Partners are not considered employees of the business for federal tax purposes. They can set up employee benefits such as group life, health and disability insurance for their employees, but partners may not deduct the cost of providing their own coverage under these plans except for health insurance.
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