A partnership is a business form created automatically when two or more persons engage in a business enterprise for profit. Consider the following language from the Uniform Partnership Act: “The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership.” A partnership–in its various forms–offers its multiple owners flexibility and relative simplicity of organization and operation. In limited partnerships and limited liability partnerships, a partnership can even offer a degree of liability protection.

Partnerships can be formed with a handshake–and often they are. Responsible partners, however, will seek to have their partnership arrangement memorialized in a partnership agreement, preferably with the assistance of an attorney. Because partnerships can be formed so easily, partnerships are often formed accidentally through oral agreements. A partnership is formed whenever two or more persons engage jointly in business activity to pursue profit.

Don’t operate a partnership without a written partnership agreement. Because of its informality and ease of formation, the partnership is the most likely business form to result in disputes and lawsuits between owners–oral partnership arrangements are usually the reason.

The cost to have an attorney draft a partnership agreement can vary between $500 and $2,000, depending on the complexity of the partnership arrangement and the experience and location of the attorney.

Advantages of the Partnership

  • Owners can start partnerships relatively easily and inexpensively.
  • Partnerships do not require annual meetings and require few ongoing formalities.
  • Partnerships offer favorable taxation to most smaller businesses.
  • Partnerships often do not have to pay minimum taxes that are required of LLCs and corporations.

Disadvantages of the Partnership

  • All owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business (except in the cases of limited partnerships and limited liability partnerships).
  • Individual partners bear responsibility for the actions of other partners.
  • Poorly organized partnerships and oral partnerships can lead to disputes among owners.

Author: Orkun Ozkaymak, CPA, MBA
Orkun Ozkaymak, CPA, MBA