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What Is a Partnership?

By Jerry Morrison
Updated May 16, 2024
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A partnership is a profit motivated business relationship between two or more participants. The participants may be individuals, groups, companies or corporations. Types of business partnerships are typically defined by the role each partner plays in the operation of the business, and the amount personal liability the partners assume. Common forms include general partnerships, limited partnerships, and limited liability partnerships.

General partnerships are a common business relationship in most countries. The terms may vary, but the degree of involvement and personal liability of the partners remain the same. In this type of partnership, each partner shares in control of the business operation and in the division of any profits. Additionally, partners are individually and collectively liable for any and all debts arising from business activity undertaken in the name of the partnership, by any partner. Any one partner can also contractually bind the partnership, with or without the knowledge or consent of the other partners.

The degree of personal exposure in general partnerships is often accepted because of tax considerations. If each partner is taxed according to personal income level, then he or she might face a lesser tax burden under this business arrangement. A partner may also use business losses to offset tax liability from other investments or ventures. A special working or personal relationship between participants might make the open nature of this form of partnership attractive, as well.

Limited partnerships consist of a general partner and one or more limited partners. The general partner has sole authority in the management and control of business activity. Because of this, the general partner assumes sole personal liability for the debts and obligations of the company. The limited partners take no active part in the management of the business, and their personal financial liability is limited to the amount invested. By prior arrangement, the general partner may be entitled to a greater share of the profits than the limited partners.

Another type of partnership, the limited liability partnership, is similar to general partnerships in most matters. Under this arrangement, however, a partner can not be held liable for the consequences of negligence or illegal activity on the part of another partner. Limited liability partnerships, in this regard, have elements of both a partnership and a corporation. Its implementation varies widely among countries and even among jurisdictions within a country. This type of business arrangement accommodates the desire of participants to have a direct role in management, while being shielded from the actions of other partners that may not be in the best interest of the partnership.

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