Types of Partnerships:

Before you start a partnership, you will need to decide what type of partnership you want. You may have heard the terms:

1. A general partnership is composed of partners who participate in the day-to-day operations of the partnership are who have liability as owners for debts and lawsuits.
2. A limited partnership has one general partner who manages the business and one or more limited partners who don't participate in the operations of the partnership and who don't have liability.
3. A limited liability partnership (LLP) is similar to the limited partnership, but it may have several general partners. An LLP is formed by partners in the same professional category (accountants, architects, etc.) and the partnership protects partners from liability from the actions of other partners. Each state has different categories of professionals that it allows to form an LLP.

Types of Partners in a Partnership

Partners can include individuals, groups of individuals, companies, and corporations.

• General partners participate in managing the partnership and have liability for partnership debts and obligations.
• Limited partners invest but do not participate in management.
• Equity partners and salaried partners. Some partners may be paid as employees, while others have only a share in ownership.
• The different levels of partners in the partnership. For example, there may be junior and senior partners. These partnership types may have different duties, responsibilities, and levels of input and investment requirements.

Requirements for Joining a Partnership:

An individual can join a partnership at the beginning or after the partnership has been operating. The incoming partner must invest in the partnership, bringing capital (usually money) into the business and creating a capital account. The amount of the investment and other factors, like the amount of liability the partner is willing to take on, determine the new partner's investment and share of the profits (and losses) of the business each year.

Forming a Partnership:

Partnerships are usually registered with the state in which they do business, but the requirement to register and the types of partnerships available vary from state to state.Some states allow different types of partnerships, and there are different types of partners, based on their participation in the business and the type of partnership. Partnerships use a partnership agreement to clarify the relationship between the partners, the roles and responsibilities of the partners, and their respective shares in the profits or losses of the partnership.

This agreement is just between the partners; it's not registered with a state.

Once you have registered with your state, you can then proceed to the other typical tasks in starting a business.

The Importance of a Partnership Agreement:

When a partnership is formed, one of the first acts of the partners should be to prepare and sign a partnership agreement. This agreement describes all the responsibilities of the partners, sets out each partner's distributive share in profits and losses, and answers all the "what if" questions about what happens in a number of typical situations.

One good example of how a partnership agreement is important involves the situation when a partner leaves the partnership. If there is no partnership agreement to spell out how to handle everything, state law determines everything.

The partnership agreement should include:

• Details on the duties and responsibilities of each active partner
• Roles of specific partners who have day-to-day management
• How and when contributions must be made
• How distributions are set.

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How Partners are Paid:

Partners are owners, not employees, so they don't get a paycheck. Each partner receives a distributive share of the profits and losses of the business each year. Payments are made based on the partnership agreement, and the partners are taxed individually on these payments.

In addition, some partners may receive a guaranteed payment which isn't tied to their partnership share. This payment is usually for services like management duties.

How a Partnership Pays Income Taxes:

As noted above, the partnership business doesn't pay any income tax; the partners pay the taxes of the business, based on their share of the profits for a specific year, as spelled out in the partnership agreement.

The partnership income tax is passed through to the partners, who are taxed from the income (or loss) of the partnership on their personal income tax return.

Multiple-member limited liability companies (LLCs) file income taxes as a partnership.

How Partners Pay Income Tax

Individual partners pay income taxes on their share of the income of the partnership.

Partners are self-employed, and they must pay self-employment tax (Social Security/Medicare tax) on their share of partnership earnings.

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