A partnership is a business entity in which two or more co-owners own and operate a business. A partnership is generally formed with a written partnership agreement between the co-owners. Each partner is jointly and severally liable for the debts and other obligations of the partnership. Partners have unlimited personal liability and creditors may look to the personal assets of any partner to satisfy outstanding claims that exceed partnership assets.

A partnership agreement will generally provide for the manner in which profits and losses are allocated to each individual partner. In the absence of a partnership agreement profits and losses are shared equally among the partners.

A potential disadvantage to forming a general partnership is it that ALL partners are deemed to be an agent of the partnership and have the legal authority to bind the partnership and other partners. You need to have complete trust in your other partners since they can basically make decisions in your name. (Never enter into a general partnership arrangement (or even imply a partner relationship) with someone you don’t know or trust implicitly.) Further, each partner may be held jointly and severally liable for certain torts and wrong doing of co-partners.

Although a partnership files a Form 1065 partnership tax return with the IRS, it is not considered a separate taxpaying entity. The partnership's return is an information return showing the items of partnership income and expenses that flow through to the partners’ individual Form 1040 income tax returns. This information is detailed on each partner Schedule K-1.

Because partners’ interests may not be freely traded, general partnerships should not be formed if liquidity of investments is desired. The contribution and distribution of capital is generally allocated in the partnership agreement. Changes in the allocation may be made by unanimous consent or as stipulated in the partnership agreement. Subsequent persons may be admitted to the partnership, pursuant to established partnership agreements or by unanimous consent of the partners. Generally, the operation, management, profit / loss allocation and termination provisions of the partnership are carefully detailed in the partnership agreement.

Partnerships have a limited life and cannot operate in perpetuity; death, disability or withdrawal of a partner may cause a termination of the partnership. The termination of a partnership can have potentially costly tax effects.
 

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