Partnerships are one of the most common ways for two or more people to run a business together. They can be simple to form and offer flexibility, but they also come with important responsibilities. From agreements and taxes to contributions, self-employment rules, and how partnerships can change over time, here are seven key points every business owner should understand before starting or joining a partnership.

1. What a Partnership Is

• Formed when two or more people agree to carry on a business and share profits/losses.
• Can be formal (written agreement) or informal (oral agreement).
• Common types: general partnerships, limited partnerships (LP), and limited liability partnerships (LLP).

2. Partnership Agreement

• Outlines each partner’s rights, responsibilities, and share of profits/losses.
• Strongly recommended (though not required) to prevent disputes.

3. Taxes

• Partnerships themselves do not pay income tax.
• Instead, they file an informational return (Form 1065) and issue Schedule K-1 to each partner.
• Partners report their share of income, losses, deductions, and credits on their personal tax returns.
• This is called pass-through taxation.

4. Contributions and Distributions

• Partners may contribute cash, property, or services.
• Distributions to partners aren’t automatically taxable if they represent a return of invested capital, but earnings must be reported when allocated.

5. Self-Employment Tax

• General partners usually pay self-employment tax on their share of income (Social Security & Medicare).
• Limited partners typically do not, unless they receive guaranteed payments.

6. Losses

• Losses can offset other income, but limits apply (basis, at-risk, and passive activity rules).

7. Ending or Changing a Partnership

• Partnerships can end if a partner leaves, new partners join, or operations cease.
• Important to file final returns and notify the IRS.

Pros of a Partnership

• Easy to form, flexible structure.
• Pass-through taxation (no double tax like corporations).
• Shared responsibility and expertise.

Cons of a Partnership

• General partners have unlimited liability for business debts.
• Profits are taxable to partners even if not distributed.
• Disagreements between partners can cause problems without a clear agreement.

Takeaway for New Businesses

If you’re starting with one or more co-owners, a partnership can be a flexible way to operate and avoid double taxation. However, you should carefully draft a partnership agreement, understand your tax obligations, and weigh liability concerns. Consulting a tax advisor or attorney is highly recommended before forming a partnership.