The decision you make in terms of the form your business will take is, again, one of the most important and consequential decisions you'll make as an entrepreneur. Let's talk about partnerships. In this lesson, we are going to give you a good definition of what a partnership is and the various types of partnerships. We'll explore the different tax treatments that come with the various forms of partnerships, and then say a few words about the partnership agreement. A partnership is a business entity that's ran by at least two people, so you can't have a single member partnership. For you that are engaging with co-founders and other partners in the start of your business, a partnership will be one of the forms of business that may be available to you. If you are a single founder, operating and finding the business by yourself, not in partnership with someone else, then a partnership would not be the business form that you'd want to consider. Now, generally speaking, a partnership is treated as a separate entity. It can own property, it can buy or sell property in its own name, it can be sued in the partnership's name. As a general matter, although you have individuals who are partners in the business venture, the partnership itself as an entity stands alone as a separate entity. Now, general partnership. That's one type of partnership. In a general partnership, each partner is what we call a general partner. Now, this term general partner is a unique term for general partnerships and limited partnerships which we'll talk about in a second. But with respect to general partnerships, each general partner has the ability to obligate the partnership. They are essentially owners of the partnership. If they are interfacing with a vendor or a contractor, they have the ability to sign on behalf of the partnership and obligate the partnership to that contract or that agreement with the third party. Each general partner also has unlimited liability for the debts of the partnership. What that means is that each general partner as an individual can be held responsible. Their personal individual assets can be held responsible for any debts or obligations on behalf of the partnership. That each general partner is essentially an agent of the partnership, so any acts that they do can be attributed to the overall partnership. Now, you can get certain types of insurance to mitigate some of the concerns of a partner of yours going out and doing things that increase the liability for your partnership. But generally speaking a general partner's actions can be attributed to the general partnership. Limited partnerships are a different type of partnership form. It's comprised of one or more general partners who have the same obligations as we just spoke about in a general partnership and one or more limited partners. Now, limited partners are a different class of partners in a limited partnership. These partners, they contribute capital to the partnership. They may participate in management of the company, but they are prohibited from participating in control of the company. In return for this limitations and control, a limited partner, their liability to the partnership is kept at whatever capital contribution they've made to the partnership. For example, in a general partnership, if the partnership is sued, either or both of the general partners have unlimited liability for the debts of the partnership. In a limited partnership, the general partners still would have unlimited liability for the debts of the partnership, whereas a limited partner would only have liability up to the amount of capital they've put into the partnership. That limited partner's personal assets would be shielded from liability of the limited partnership. Now, limited liability partnership. It's a third type of partnership. This one is fairly where it's usually reserved for professional organizations like law firms or accounting firms, it's a hybrid type of partnership- It's a hybrid of the general partnership and a limited partnership in that each partner can participate in the control of the business. It's not general partners can control, limited partners can't. Each partner can participate in the control of the business. Rather than each partner having unlimited liability for debts of their partnership, each partner has unlimited liability for their own acts. For a lawyer malpractice or an accountant malpractice, that individual accountant or lawyer can have unlimited liability for their own acts. But the other partners, their liability is limited to the assets of the partnership. If a lawyer in a law firm has a malpractice claim, that individual lawyer will have unlimited liability for the claim, whereas the other partners in their limited liability partnership, their liability would extend to the limits of the partnership's assets. Thus the other partners, their individual assets, will be shielded from liability. Similar to limited partnerships, you can acquire certain types of insurance to help mitigate some of the liability for each of the partners in a limited liability partnership. Let's talk about tax treatment for partnerships. A partnership itself does not pay taxes on its activities. Typically, a business form, although treated as a separate entity, different business forms have different tax treatments. A partnership, while it's a separate entity, does not pay taxes on its own. The tax is actually what we call pass through to the individual owners of the partnership, the individual partners. Those individual partners pay taxes on their interests in the profits of the partnership. The partnership makes money, depending on your percentage of ownership in the partnership, you would pay individual taxes on your percentage of ownership and the profits of the partnership. Now, let's talk about the partnership agreement. Now, a partnership agreement can take any form, a handshake, an exchange of promises between two people that meets the requirements of a contract, you probably have a partnership agreement. But you should always get your partnership agreement in writing. That's because most states have a certain default provisions in place for what's required for a partnership. However, most states allow those default provisions to be overridden by a written partnership agreement. By having a partnership agreement, you can actually address key elements like, what happens when the partnership dissolves? How will you share profits and losses amongst the partners in the partnership? Capital investments, who's contributing what and the percentages around capital that's being contributed to the partnership. Then an important provision is dispute resolution. How will you resolve disputes between partners that may come up from time to time? By having a written partnership agreement, you're able to clearly spell out these key elements and other elements so that it's very clear between you and your business partners where everyone stands. Just as a summary, general partnerships and limited partnerships expose general partners to unlimited personal liability for the debts of the partnership. If you are considering that corporate form as a general partnership or a limited partnership, keep in mind that the general partners will have their personal assets subject to being used to satisfy the debts of the partnership. Limited partnerships and limited liability partnerships provide some limitations on liability for the limited partners, and all partners in the case of a limited liability partnership. In partnerships, partners pay taxes on their individual interests in the partnership's profits. The partnership itself does not pay taxes separately, the individual partners pay taxes on their interests in the business entity. As a final reminder, partnership agreement are very important in terms of spelling out the roles and responsibilities, capital contributions. How do you resolve disputes? What happens when the partnership dissolves? All of these types of key elements are very important to address in a partnership agreement, and it's very important to remember that your partnership agreement should always be in writing.
