A partnership acts as an unincorporated business operated by two or more individuals. Once two or more individuals agree to go into business, a partnership is automatically formed. Documents need not be filed with the state as a condition of establishing a partnership. A partnership is the easiest and least expensive way to form a business with more than one owner.
A partnership will automatically assume the same legal business name as that of the partners. A partnership may be allowed to use another business name other than the legal name of the partners by filing a "doing business as" application. Paperwork for an assumed business name should be filed with the city or county clerk's office where the partnership is located. In some instances, an assumed business name may be filed with the secretary of state's office. The business name must not be in use by another business entity in the same state. Most states allow businesses to verify the availability of a business name by searching the secretary of state's or Department of State's website.
Partners in a partnership have unlimited liability for business losses, obligations, debts and lawsuits. This means the partners' personal assets may be used to satisfy business debts and obligations. Business creditors may seize a partner's home, car and other personal assets if the company's assets aren't enough to pay the creditor, according to the Nolo website. In addition, a partner may be liable for the negligence of another partner, regardless of his ownership interest in the business. For example, a partner who owns 25 percent of the business will be responsible for 100 percent of the company's debt if the other partners can't pay their share of the debt.
Since a partnership isn't a separate legal entity from the owners of the business, a partnership doesn't file business taxes. A partnerships is treated as a "pass-through entity," meaning the company's profits or losses are passed to the partners, as explained by the IRS. Partners report their share of company profits on their personal income tax return. Furthermore, the IRS requires a partnership to file Form 1065, also known as Schedule K-1, which acts as an informational return. Form 1065 is used to ensure that partners are accurately reporting their income and losses from the business.
In many instances, a partnership requires less paperwork and formalities compared with incorporated companies. Partnerships aren't required to hold annual meetings or record actions that occurred at the meetings. In addition, partnerships don't have to file annual reports or select board members. Partners may pool their funds and talents to make the business function more smoothly.
A written partnership agreement is an internal document that specifies information such as the manner in which business profits and losses will be divided, as well as the rights and duties of the partners. A partnership agreement helps partners avoid disputes that would probably arise if the agreement weren't in place. The partnership agreement also should include provisions for dissolving the business in case a partner passes away or withdraws from the business.