Partnership

What Is a Partnership?

A partnership is one of the most common ways to organize a business. Two or more individuals, or other entities, agree to run an enterprise together and to split its profits and losses according to an agreement. Unlike a corporation, a partnership is not a separate legal shareholder-owned company in the way many investors expect, and its owners usually share responsibility for the business's obligations.

How a Partnership Works

Partners typically contribute money, property, skills, or labor. In return, they receive a share of the income the business earns, which may be split equally or by a formula set out in a written partnership agreement. Each partner often has authority to act on behalf of the business, so one partner's decisions can bind the others. Because of this, the partnership agreement usually covers topics such as how decisions are made, how new partners are admitted, and how a partner can leave.

Partnerships are generally taxed as "pass-through" entities. The business itself does not pay income tax on its profits. Instead, the income and losses flow through to the partners, who report their shares on their own tax returns. The rules for how this works vary by jurisdiction.

Types of Partnership

The two most common forms are the general partnership and the limited partnership. In a general partnership, all partners share management and are personally liable for the business's debts. A limited partnership has at least one general partner, who carries full liability, and one or more limited partners, whose liability is generally capped at the amount they invested, but who usually take little part in running the business. Many jurisdictions also recognize limited liability partnerships, which shield partners from certain liabilities arising from other partners' conduct.

Why It Matters to Investors

For individual investors, partnerships matter for several reasons. Publicly traded partnerships, such as master limited partnerships, trade on stock exchanges like corporate shares, so investors can hold units in them directly. Investors may also encounter private partnerships, such as certain real estate or investment funds, which are generally less liquid and less transparent than public companies. Because partners are often personally exposed to the business's debts, and because income is passed through to owners, understanding the partnership structure helps investors judge both their potential risk and their likely tax treatment.