Partnership: Definition, Example and Related Terms
What is a Partnership ?
Partnerships are common in businesses where personal trust and confidence are paramount, such as professional practices like law and accounting firms. A partnership agreement is a contract between the partners in your business that sets out the legal relationship between the partners, including the percentage of ownership and distribution of profits and losses. A partnership does not have to be an equal split, and can be divided in any way the partners see fit.
It is important to note that in a partnership, each partner is personally liable for the business's debts. This means that if the business can't pay its debts, the partners are personally responsible for the amount. This is known as unlimited liability. There are different types of partnerships, including limited partnerships (LPs) and limited liability partnerships (LLPs). In an LP, there is at least one general partner with unlimited liability. All other partners have limited liability and limited control over the company. Profits are passed through to personal tax returns, and the general partner must also pay self-employment taxes. In an LLP, every partner has limited liability, so they are protected from the actions of the other partners. Each partner is also protected from debts against the partnership. They are not responsible for the actions of other partners, and can operate the business directly.
What industries are Partnerships common in?
Partnerships are extremely common in Law firms, Accounting and Audit firms, Medical Practices, Consulting Firms, Architecetural Firms, Real Estate firms, Venture Capital and Private Equity Firms and Engineering Firms.
Partnerships frequently bring together groups of professionals to collaborate together who share in the management and profits of the business. So you find them commonly in service related business where professionals hire out their expertise.
Example(s)
Scenario Description Two friends, Alice and Bob, decide to start a bakery business together. They both contribute an equal amount of money to start the business and agree to share the profits equally. They register their business as a partnership. In this example, Alice and Bob have formed a partnership. They have both invested money into the business and will share the profits equally. As partners, they are both personally liable for the business's debts. This means if the business can't pay its debts, Alice and Bob are personally responsible for the amount. A group of lawyers decide to form a law firm. They form a limited liability partnership (LLP) where each partner is responsible for their own actions but not for the actions or negligence of the other partners. In this example, the group of lawyers have formed an LLP. This type of partnership protects each partner from debts against the partnership, and from the actions of the other partners. Each partner in an LLP is not personally liable for the debts of the partnership or the negligence of other partners.