Definition: A partnership is a form of business organization in which owners have unlimited personal liability for the actions of the business, though this problem can be mitigated through the use of a limited liability partnership. The owners of a partnership have invested their own funds and time in the business, and share proportionally in any profits earned by it. There may also be limited partners in the business, who contribute funds but do not take part in day-to-day operations. A limited partner is only liable for the amount of funds he or she invested in the business; once those funds are paid out, the limited partner has no additional liability in relation to the activities of the partnership.
There should be a partnership agreement, which details the mechanics of how to make decisions, how to add new partners and pay off those who wish to leave, how to wind up the business, and so forth. However, it is not necessary to have a written partnership agreement. An oral one may be sufficient to prove the existence of a partnership.
A partnership can also refer to the following:
- The individuals who work together to operate a business as its owners.
- A group of corporations and/or individuals who are acting together to operate another business, possibly including investments in that business. The resulting business may not legally be a partnership, but the action of the partners in creating the business may be considered a partnership.
A partnership is supposed to maintain its own accounting records. It does not pay income taxes. Instead, the various partners report their share of the partnership's profit on their their personal income tax returns.
A partnership is typically terminated through a winding up process, where the partnership collects all funds due to it from customers, pays off creditors, terminates any other liabilities, and pays any remaining funds to the partners in the business.