A partnership exists if:
- There is an association of two or more people,
- Who have not incorporated, and are
- Carrying on a business for profit as co-owners.
This partnership exists if these conditions are met, even though the persons involved may not know it or even intend that their business be a partnership—and even if they don’t actually make a profit. This is called a general partnership, and can exist with no formalities. It is essentially a sole proprietorship with more than one person, including the unlimited personal liability associated with the business entity.
In a limited partnership, there is at least one general partner—who has the unlimited liability described above, and at least one limited partner. The limited partner has legally limited liability: they can only lose the amount of money they invested into the partnership; they incur no personal risk. In terms of business responsibilities, the general partner does the brunt of the work, running the day-to-day affairs, while the limited partner is forbidden from managing company business. This relationship may be advantageous if you have a lone, or a few, investors interested in supporting your venture but not interested in being active participants. However, if both partners have an equal stake in the business, they can both be general partners.
The greatest asset of a partnership is its flexibility. Partners can make virtually any arrangements defining their relationship that they prefer. In a partnership, the partners can agree to split ownership and profits in more accommodating ways, and losses can be allocated on a different basis from profits.
The main disadvantage of either form of partnership is the unlimited liability of the general partners. However, there are additional (potentially costly) steps that can be taken to minimize the risk to the general partner’s assets. The general partner does not have to be a person, it can be another business entity like a corporation; this business form provides protection for the general partner. In addition, a partnership is more easily dissolved than a corporation. Partnerships dissolve automatically when the general partner dies, files for bankruptcy, retires, resigns, or otherwise ceases to be a partner. In contrast, a corporation can continue perpetually unless a specific action is taken to dissolve it.