Definition of a Partnership

by Investing School on April 14, 2010

A partnership is a type of business organization that is unincorporated. The business will have several individuals who are called general partners. These partners will manage the business but are all equally liable for any debts that are incurred by the business. The partners will also share equally in the company’s profits. There are individuals that are limited partners that can invest in the company but they may or may not be directly involved in the management and day-to-day activities of the business. They are liable only to the extent of the investment they made in the company.

A partnership is different from a Limited Liability Corporation because each partner shares in each aspect of the business. This would entail sharing profits, debts and other liabilities. The partnership itself is not taxed as an entity. However, each partner must report his or her portion of the business’s profits or losses on his or her individual tax return. It is also necessary for each partner to estimate his or her tax payments for the year in progress. Partnerships are often preferred over corporations because of these tax advantages. The partnership is not usually taxed on profits before it is distributed between the partners.

One of the downsides to have having a partnership, however, is that the owners may be accountable to a greater amount of personal liability than the shareholders would be in a corporation. This, of course, depends on the jurisdiction in which the partnership operates.

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