Definition of Partnership

A partnership is an agreement in which two or more people join together in a business opportunity. The type of partnership can determine if each person shares both liabilities and profits. The three most common types of partnerships are general, liability and limited liability.

Why is this term important?

Distinguishing what type of partnership would work best is essential. Before accepting any new business ventures, define your partnership and work through all necessary agreements. Consider how decisions will be made, who will own what percentage, and who pays for what and when during the partnership arrangement. Also, consider whether or not the partnership will terminate once the property is sold or the business is terminated, or if the partnership will persist past the point of the property sale or business venture ends.

General partnerships mean that all people involved will share all profits and liabilities that come from the working relationship. Limited liability partnerships dictate that each party in the business holds personal responsibility for any debts. Lastly, a limited partnership is a combination of the above two partnerships. One person (sometimes known as a silent partner) provides the money, and the other general partner is responsible for all liabilities. 

Examples of term

You and your friend decide to purchase, fix-up and sell property as a business. Together you agree to share all liabilities and profit. You and your partner have just agreed to a general partnership. In a bad stroke of luck, your friend ends up divorcing her spouse and she is left with a large debt. As a general partnership, you may now be responsible for a portion of that debt.

Later in life, you decide to start another business, but this time choose a limited liability partnership with a new friend. When they get into financial trouble, you are grateful for your choice as you are not responsible for your friend’s debts.

Before you retire, you are looking to become a silent partner in a limited partnership. You provide the general partner with money to start the company in the understanding that you will share in the profits of the company, but the general partner is responsible for the day-to-day operations and for any debts incurred.