What Is a Business Partnership? Types, Pros, Cons, Plus How to Form One (2025)

A partnership is a type of business entity where two or more people share ownership and responsibility for a company. Business partners receive profits and are liable for debts based on the terms of a partnership agreement.

There are several recognized types of business partnerships, and unlike corporations, they are not taxed separately from individual partners. Find out more about partnerships, including types, pros and cons, taxes, and how to form one, in this guide.

What is a partnership?

A partnership is a collaborative relationship between two or more parties aimed at achieving shared goals or mutual benefits. It can take various forms, including business partnerships, strategic alliances, and joint ventures. To foster trust and accountability among partners and drive growth and innovation, it’s essential to establish clear roles, responsibilities, and communication strategies.

In business, a partnership is a formal business structure where two or more people—known as partners—share company ownership, profits, and liability. Partners can be individual people, corporations, or other types of business. Not every member in a partnership will hold an equal role. General partners are actively involved in the business’s day-to-day work and contribute labor or knowledge. In contrast, limited partners may be restricted to only contributing capital.

There are several types of business partnerships. Within those arrangements, partners can create agreements to define roles and responsibilities. Agreements govern most partnerships.

What goes into a partnership agreement?

A partnership agreement can be written or oral, though a written agreement is highly recommended to prevent disputes and clearly define the terms of the business relationship. It can be modified with the consent of all partners. A robust partnership agreement will likely contain information on:

• The stake each partner has in the business, including initial capital contributions and ongoing investment requirements
• Partner roles and responsibilities within the businesses, outlining daily duties, management authority, and decision-making processes
• Profit and loss sharing arrangements, detailing how profits and losses will be allocated among partners, which may not always be equal
• Provisions for ending the partnership, including conditions for dissolution, winding down business affairs, and distributing remaining assets
• Provisions for modifying the partnership and adding new partners, outlining the process and requirements for making changes to the agreement or bringing in new individuals or entities
• Grounds for removing a partner, specifying conditions under which a partner can be involuntarily removed from the partnership and the process for doing so
• Dispute resolution methods, such as mediation or arbitration, to address disagreements between partners
• Buy-sell provisions, outlining what happens if a partner leaves, retires, or dies, and how their interest in the partnership will be valued and handled

Types of partnerships

In for-profit business, there are several main categories of partnership structures recognized in common law jurisdictions like the US and the UK, as well as joint ventures. Deciding which type of partnership is best for your business depends on several factors, including the partners’ goals, tolerance for liability, involvement in management, and the nature of the business or profession. 

Specific rules and requirements for forming and operating these partnership types can vary significantly by state or jurisdiction, so it’s a good idea to consult with a legal professional in your state to understand the specific laws that apply to your partnership.

General partnership (GP)

In a general partnership, each partner shares equally in a business’s work, liability, and profits, unless otherwise specified in a partnership agreement. It’s often the simplest way for two or more people to start a business together, and can sometimes form automatically through the actions of the partners without formal registration.

General partners are actively involved in daily tasks and can contribute labor and expertise, as well as capital, to the business.

However, a significant characteristic of a general partnership is that partners have unlimited personal liability for all partnership activities and debts, even those they’re not directly part of. This means their personal assets are subject to legal claims against the partnership.

Limited partnership (LP)

Limited partnerships (LPs) have two distinct types of partners: at least one general partner with unlimited liability and one or more limited partners with limited liability. Limited liability in an LP means a partner’s personal assets are generally protected from business debts beyond their initial investment.

In this way, LPs are a hybrid between GPs and LLPs. General partners manage the business and are fully liable for its debts and obligations. Limited partners typically contribute capital but have limited control over the day-to-day operations of the company, as documented by a partnership agreement.

One benefit of a limited partnership is that it allows people to invest in your business without becoming personally liable for its debts.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.

Limited liability partnership (LLP)

In a limited liability partnership (LLP), partners have limited personal liability for the business’s debts and obligations. A key feature of an LLP is that it typically provides partners with protection from liabilities arising from the negligence or misconduct of other partners.

This level of asset protection is why LLPs (or a state-specific equivalent) are a standard business structure for certain types of professional businesses, such as accountants, lawyers, doctors, and architects.

If one business partner in an LLP is sued for malpractice, for example, the personal assets of other partners are generally protected from that specific claim, even if the partnership defaults. 

Limited Liability Limited Partnership (LLLP)

A limited liability limited partnership (LLLP) is a newer business structure available in some US states. Similar to an LP, an LLLP has both general and limited partners, but it offers an additional layer of liability protection. In an LLLP, the general partner receives the same limited liability protection as the limited partners, meaning the general partner’s personal assets are shielded from the partnership’s debts and obligations, similar to the protection afforded to partners in an LLP. This structure is not available to every type of business, and specific regulations vary by state.

Joint venture

A joint venture is a business arrangement where two or more parties agree to pool resources and expertise to pursue a specific project or business activity. 

When a joint venture describes only the sharing of expenses, short-term collaboration, or the pooling of resources without creating an ongoing shared business for profit, it may not constitute a formal partnership. However, if the arrangement functions like a shared business with mutual interests and profit and loss sharing, it can be legally considered a partnership.

The pros and cons of entering a business partnership

Sole proprietors often face challenges surrounding time management, finding resources, and connecting with experts within their industry. Forming a partnership can be an effective way to solve these issues by pooling labor, resources, and experience, potentially increasing the chances of success for a new business.

On the other hand, a poorly considered partnership, especially a general partnership, can leave you personally liable for actions taken by others within your business.

Here are some general pros and cons of structuring a business as a partnership:

Partnership pros

• General partnerships are often easy and inexpensive to set up and maintain over time, sometimes requiring no formal state registration.
• Partners can pool financial resources and creditworthiness to invest in tools, inventory, and infrastructure, potentially securing more capital than a sole proprietor.
• Partners can share the workload, responsibilities, and management duties, and bring in prior expertise or complementary skill sets.
• When correctly established, a limited partnership or limited liability partnership provides liability protection for partners, shielding personal assets from business debts or the actions of other partners.
• The prospect of partnership can be an incentive for key employees or future collaborators.

Partnership cons

• Partners must share profits, which can result in less individual financial gain compared to a sole proprietorship.
• Unresolved differences of opinion, disagreements, or conflicts among partners can threaten the business’s stability and success.
• A poorly written or non-existent partnership agreement can create disagreements over profit and liability allocations, decision-making authority, and what happens if a partner leaves.
• In a general partnership, partners have unlimited personal liability for business debts and the actions of other partners, putting personal assets at risk.
• Managing an LLP or LP and staying compliant with specific state registration and tax regulations takes additional time and resources compared to a general partnership.
• Limited partners may feel less personally motivated about the success of a business.

Partnership taxes

Business partnerships are required to report their income, losses, deductions, and credits to the IRS and relevant state tax authorities. However, partnerships themselves do not file income tax returns or pay federal income tax. This pass-through taxation is a key characteristic that distinguishes partnerships from corporations.

How partnerships are taxed

Partnerships operate under a “pass-through” or “flow-through” taxation model. This means the business’s profits and losses are not taxed at the partnership level but instead pass through directly to the individual partners. Each partner reports their share of the partnership’s income or loss on their personal income tax return, but a partnership must also file a Form 1065.

Partners are responsible for paying income tax on their distributive share of the partnership’s taxable income. General partners are typically considered self-employed and are also responsible for paying self-employment taxes (Social Security and Medicare taxes) on their share of the partnership’s earnings. Limited partners generally do not pay self-employment tax on their share of passive income from the partnership.

Specific tax rules and requirements can vary based on the type of partnership, the nature of the partners (individuals, corporations, etc.), and state tax laws. Consulting with a tax professional familiar with partnership taxation in your state is highly recommended.

Key tax forms for partnerships

The IRS has a list of tax forms that may be relevant to your partnership, including:

Form 1065

Partnerships are required to file an annual information return with the IRS, typically using Form 1065, US Return of Partnership Income. This form reports the partnership’s financial results but is for informational purposes only; no income tax is paid with this form.

Schedule K-1

Along with Form 1065, the partnership issues a Schedule K-1 (Form 1065) to each partner. The Schedule K-1 reports each partner’s share of the partnership’s income, losses, deductions, credits, and other items. Partners use the information on their Schedule K-1 to report their share of the partnership’s financial results on their individual income tax returns.

Schedule SE

General partners may also need to file Schedule SE (Form 1040), Self-Employment Tax, to calculate and pay self-employment taxes on their earnings from the partnership.

Partnerships may also be required to make estimated tax payments throughout the year to cover the income and self-employment taxes owed by the partners on their share of the business’s profits.

How to form a business partnership

Forming a business partnership involves several steps, although the specific requirements can vary significantly depending on the state or jurisdiction where you establish the business. While general partnerships can sometimes be formed informally through agreement and action, formalizing the partnership is highly recommended to avoid any potential future disputes and clearly define the terms of the business relationship. Consulting with legal and financial professionals familiar with your state’s requirements is always a good idea.

Here are the general steps involved in forming a business partnership:

1. Choose your partners wisely

Selecting the right partners is critical, as you will share responsibility, profits, and potentially liabilities. Consider their skills, work ethic, values, and financial stability. This is a foundational step for success in any partnership.

2. Decide on a business name

Select a unique name for your partnership. You may need to check for name availability and register the name with the state or local government, especially for LPs, LLPs, and LLLPs.

3. Draft a partnership agreement 

Create a comprehensive written partnership agreement that outlines the terms of the partnership, addressing each partner’s contributions, roles, profit and loss sharing, and decision-making power, as well as processes for dissolution, dispute resolution, buy-sell agreements, and more. Consulting with a legal professional to draft this agreement is highly advisable to ensure it’s legally sound and covers all potential issues.

4. Register your partnership

Depending on the state and the type of partnership, you may need to file registration documents with your state government, typically the Secretary of State’s office. General partnerships often do not have this formal state registration requirement, but registering can still offer benefits.

5. Get an employer identification number (EIN) 

A partnership typically needs an employer identification number (EIN) from the IRS for tax purposes, even if it has no employees. You can apply for an EIN online through the IRS website.

6. Obtain licenses and permits

Secure any necessary federal, state, or local business licenses and permits required to operate your business legally. The specific licenses needed will depend on your industry and location.