A partnership is a relationship between two or more persons to conduct a trade or business with a for-profit motive. Partners must carefully assess whether the arrangement is a partnership or a joint venture (JV). Although a partnership and a joint venture appear to be the same thing, they have some critical differences.
Partners form a partnership to operate a business, where they share in the company’s profits, losses, liabilities, and assets. A joint venture is formed to complete a specific task or project only.
In the United States, two or more persons can form a general partnership by agreement, written or oral, and does not require a formal filing with the Secretary of State. In some states, Delaware for example, a general partnership may file a Statement of Partnership Existence, but it is not required.
In contrast, if two or more persons want to form a limited partnership (LP) in Delaware, the general partner (GP) must file a Certificate of Limited Partnership to create the entity. If the partners want to form a limited liability company (LLC), they must file the Articles of Organization or Certificate of Formation with a state authority.
U.S. Federal Tax Rules for Partnerships
Partnerships are not taxable entities for federal tax purposes. The partnership files an annual Form 1065 (US Return of Partnership Income), which reports the partnership’s income, expenses, credits, and other tax items. The total amounts are then allocated to the partners and reported separately on a Schedule K-1 (Form 1065) for each partner. Each partner uses the information on Schedule K-1 to complete their own income tax return.
Example Partnership
John and Jane want to go into business together and operate a restaurant in Orlando, FL. John files Articles of Organization with the Florida Department of State Division of Corporations to create a Florida LLC with two members. An LLC with two or more members is, by default, a partnership for federal tax purposes.
Business owners can find more information about partnerships in IRS Publication 541 (Partnerships) and on the IRS website.