Legal Terms

partnership

When used without a qualifier such as "limited" or "limited liability," usually refers to a legal structure called a general partnership. This is a business owned by two or more people (called partners or general partners) who are personally liable for all business debts. To form a partnership, each partner normally contributes money, valuable property or labor in exchange for a partnership share, which reflects the amount contributed. Partnerships are easy to form since no registration is required with any governmental agency to create a partnership (although tax registration and other requirements to conduct business may still apply). Although not required, it is an excellent idea to prepare a written partnership agreement between the partners to define items such as ownership percentages, how profits and losses will be divided and what happens if a partner dies or becomes disabled. Partnerships themselves do not pay federal or state income taxes; rather, profits are passed through to partners who report and pay income taxes on their personal returns. See also limited partnership; limited liability partnership.