What is a partnership?

 Partnerships are often created for the purpose of accomplishing a specific project or task. When that task or project is completed, the partnership ends. Such limited purpose partnerships are often called "joint ventures". For example, two contractors create a partnership in order to build a commercial building. After the building is completed, they intend to sell it and go their separate ways. The partnership ends when the building is completed.

 

There are no formal requirements for creating a partnership. A partnership can be created by a written agreement, an oral agreement or even by conduct. For example, I own a pickup truck. I am standing next to my truck and talking to my friend Steve. Mary, my neighbor, offers to pay us fifty dollars if we will transport her refrigerator to her daughter's home. Steve and I accept Mary's offer. By accepting Mary's offer, a partnership has been created between me and Steve. I own the truck, but I need Steve's help to move the refrigerator. After we transport the refrigerator to the daughter's home, Steve and I get paid and the partnership ends. There was no written or oral agreement between Steve and me. The partnership was created by our conduct.

 

Generally, any kind of person or entity can be a partner in a partnership. People, trusts, corporations and even other partnerships can be partners in a partnership.

 

 

A written partnership agreement is highly desirable. Such an agreement reduces the possiblity of disputes between the partners. If there is no written agreement, the law assumes that any profits from the partnership will be divided equally. This division of profits might not be acceptable if one partner contributes seventy-five percent of the capital and the other partner contributes twenty-five percent.

 

A partnership files a informational tax return for the IRS. The profits and losses of the partnership are part of the income of the individual partner. Some individual states may tax partnership income directly.

 

The major advantage of a partnership is its flexibility. It can be easily formed and dissolved often without the assistance of an attorney. In many cases no forms or legal documents are required for a partnership to be created or dissolved.

 

Some major disadvantages of a partnership are the following:

1. The partners have unlimited liability for their own actions and the actions of the other partners that relate to the partnership business. It is possible for one partner to lose all that he owns due to the actions of another partner.

2. Shares of a partnership normally are not transferable. When one partner leaves or dies, the partnership ends.

3. The amount of capital that a partnership can raise is limited by the assets of the individual partners, and the partners ability to borrow money, and the ability or desirability of the partnership to add new partners.