A Partnership Agreement is a legal business operation between two or more individuals who share the management and profits of the business. Any business that will be owned and operated by more than one individual can consider structuring the business as a Partnership.
Types of Partnership Agreements
There are two main types of Partnerships:
- General Partnerships: In this type of partnership, all partners are responsible for managing the company and taking responsibility for business debts and obligations.
- Limited Partnerships: In this type of partnership, there are individuals who run the business and have responsibility for debts and obligations (general partners) but there are also limited partners whose only stake in the business is monetary. Limited partners do not have control over how the business is operated and managed. For this reason, the scope of their liabilities are different.
General Partnerships are more straightforward. Limited Partnerships come with additional filing requirements and administrative demands.
Why Form a Partnership Agreement?
One of the primary benefits to forming a Partnership Agreement is the tax treatment of the business. A Partnership Agreement is not subject to federal income tax. After partners calculate their partnership’s profits, each partner will file taxes for their share of the profit.
One concern for the partners in a Partnership Agreement is that their personal assets may be less protected from business liabilities. Generally, each partner has unlimited personal liability, and any debts incurred by the business are the responsibility of all partners.
For individuals who are concerned about the liability structure of General and Limited Partnerships, they could consider LLC Formation. LLCs have similar tax benefits to Partnerships but does not allow creditors to reach out to the pocketbooks of individual partners to satisfy debts.
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