When an individual forms and operates a small business, many times that business is set up as a very simple and straightforward sole proprietorship. However, when partners are involved in owning a small business together, a sole proprietorship is not a business structure that can be used to establish the business. Instead, for a simple and straightforward business structure, many business partners turn to a partnership.
What Is a Partnership In a Small Business?
A partnership is a business structure that can be simply set up and utilized to share ownership of a small business between business partners. Unlike an LLC (a limited liability company) or a corporation, choosing a partnership for your business structure does not require complex business filings or paperwork to be submitted to the state. Typically there are no formal requirements to establish a partnership, only a business, and shared profits.
What Is Considered a Partnership?
There are several types of partnerships that you may choose for your partnership, including a general partnership, a limited partnership, or a joint venture. If you choose a general partnership, then you and your partners will equally divide the responsibilities associated with the management of the company, and you will also equally share the profits.
While a joint venture also operates as a general partnership, if you and your partners choose a joint venture, it is only to do so for a specific and limited purpose of for a single project. If the project you engage in for your joint venture is repeated time and time again, it may actually become classified as a general partnership and become subject to the rules of dissolving a general partnership (discussed more below) should you and your partner decide to cease operations.
The third type of partnership is a limited partnership. As the name suggests, a limited partnership involves limited liability, or passive, partners that limit their involvement to the investment of funds or other resources, while the partnership on a day-to-day basis is controlled by a managing partner or managing partners. In this setup, if you are designated as the managing partner, you are responsible for the operation of the business and are responsible for the liability associated with the success or the failure of the business. For limited partners, the only risk they shoulder is their initial investment.