Definition: A partnership is an unincorporated business entity formed by two or more people. The owners of a partnership are called partners because they join efforts and resources to start the business.
What Does Partnership Mean?
Partnerships are like sole proprietorships in that no legal entity must be established. A partnership is established as soon as two or more people agree to go into business together. This is considered a general partnership because all the partners run the operations of the business share the risk and liability. A general partnership only has general partners also called unlimited partners.
These general partners split the income and loss of the partnership based on their partnership percentage. For instance, a partner who owns 33% of a partnership would receive 33% of the income or 33% of the loss for the year. Each partner reports this income or loss on his personal income tax return. This is why a partnership is considered a flow-through entity. The income or loss flows through the business to the individual.
Aside from the general partnership, there are several partnerships that have legal requirements in order to organize. You may have seen the abbreviations LP. LLP, and LLC before.
Different Types of Partnerships
LP stands for limited partnership. An LP can have limited partners who have limited liability and can’t run the day-to-day operations of the business. Limited partners are simply investors. LPs have to have at least on general partner.
LLP stands for limited liability partnerships. LLP partners are only liable for their own actions and not the actions of the other partners in the partnership.
LLC stands for limited liability company. An LLC offers limited liability to all partners much like shareholders in a corporation.