A business structure where two or more individuals or entities agree to operate a business together, sharing profits, losses, and management responsibilities according to an agreed arrangement.
What is a Partnership?
A partnership is a legal and operational arrangement in which two or more people or entities join forces to run a business. The terms of the relationship, including how profits and losses are shared, decision-making authority, and each partner’s responsibilities, are typically outlined in a partnership agreement. This structure is popular because it is relatively simple to set up and offers flexibility in management and profit distribution.
According to the IRS, a partnership is the relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill, and expecting to share in the profits and losses. This definition includes both formal partnerships established by written agreement and informal ones formed through conduct, even without an official partnership contract.
For tax purposes, the IRS treats partnerships as pass-through entities, meaning the business does not pay federal income tax directly. Instead, profits and losses are reported on an annual Partnership Return of Income (Form 1065), and each partner receives a Schedule K-1 showing their share of the business’s income, deductions, and credits. Partners then report these amounts on their individual or corporate tax returns.
There are several types of partnerships. A general partnership involves all partners sharing equal responsibility for managing the business and its debts. A limited partnership (LP) has at least one general partner who manages the business and assumes unlimited liability, along with one or more limited partners whose liability is restricted to their investment. A limited liability partnership (LLP) offers partners some liability protection, shielding them from certain obligations of the business or other partners’ actions, depending on the jurisdiction.
For non-U.S. residents forming a U.S. business, a partnership can be a viable option, but it requires careful planning. Partners may be subject to U.S. tax on income effectively connected with a U.S. trade or business, and withholding requirements may apply when distributing income to foreign partners.
Partnerships can offer flexibility, shared resources, and combined expertise, but they also require trust and clear agreements to avoid disputes, as partners may be personally liable for the business’s obligations depending on the partnership type.
