The IRS defines a Partnership as “relationship existing between two or more persons who join to carry on a trade or business.” As such, the partnership does not pay taxes but enjoys pass-through taxation. Each partner shares in the profits and losses of the business. The partners are given a Schedule K-1 (Form 1065) for their taxes.
Every state has its own laws, but typically, there are no formal requirements to establish a partnership, such as filing a document with the state (as is typical for corporations and limited liability companies) or drafting an agreement between the partners.
There are three main types of Partnerships: (1) a General (“GP”), (2) Limited (“LP”), and (3) limited liability (“LLP”).
In a GP, the partners share equally in the legal and financial liabilities of the partnership as well as the day-to-day management (absent a written agreement stating otherwise). GPs are very easy to maintain and establish. They can be established by written or oral agreement, and could technically be established unintentionally under certain circumstances.
The LP typically includes one or more Limited Partners and a General Partner. Depending on the state, there may be some type of filing fees associated with the establishment and/or maintenance of an LP. A General Partner would not typically receive limited liability. However, a Limited Partner usually will.
The LLP does offer limited liability for acts that arise from the business of the partnership. However, the LLP must maintain LLP status to receive such protection. The LLP offers flexibility in terms of structure and in terms of allocating income, gains, losses, deductions, and distributions.