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 partnership. The partnership furnishes a Schedule K-1 (Form 1065) when due to the partners.
Every state has laws regarding partnerships, 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 (LLCs) or drafting a partnership agreement.
There are three main types of Partnerships: (1) a general partnership, (2) a limited partnership, and (3) a limited liability partnership.
In a General Partnership, 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). General Partnerships 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.
Limited Partnership (“LP”)
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. Liability is typically limited for the Limited Partners, but not for the General Partner.
Limited Liability Partnership (“LLP”)
Unlike the other partnerships, the LLP provides partners with limited liability for acts that arise out of the business activities of the partnership so long as the partnership maintains its LLP status. The LLP offers a lot of flexibility in terms of form and structure in terms of allocating items like income, gains, losses, deductions, and distributions.