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A partnership in the USA is a form of business structure where two or more partners agree to operate a common business in accordance with previously accepted conditions, and to distribute the profit derived by the partnership among themselves accordingly.
A partnership is created by signing and registering the regulating document - the Partnership Agreement - in the register of the relevant State. Each State has its specific legislation regulating the principles of creating and operating a partnership in that State. However, the Partnership Agreement of each individual partnership may contain more detailed individual clauses on the manner of conducting the business and distributing the income of that partnership.
A partnership can be formed by two or more partners. US legislation does not allow a partnership to be formed by one partner only; in such a case the entity will be a simple Sole Proprietorship.
The main drawback of a general partnership is the unlimited liability of all its partners. In fact, if a debt-claim is filed against the partnership, the claim may attach to the individual property of any of its partners, whether or not the said person took part in the transactions giving rise to the debt-claims. For this reason, after the law on Limited Liability Companies was adopted in the USA, many partnerships were converted into this more flexible business entity.
For taxation purposes, US legislation applies the principle of "pass-through taxation" to the general partnership, i.e. taxation at the level of the individual partners, and not at the level of the partnership. The income of the partnership is considered to be derived directly by its partners. Although the partnership as such, files an annual information report - form 1065 (U.S. Partnership return of income) - with the US Internal Revenue Service, tax is paid by the partners in proportion to their income from the partnership.
For purposes of comparision, the table below shows the main characteristics of a General Partnership and of an LLC, which is the most popular type of business entity in the USA
| Criterion | General Partnership | Limited Liability Company | | Owner of the company | Partners | Members | | Liability of the owner | Unlimited | Limited | | Number of owners | Two or more | One or more | | Taxation | The partnership is not subject to taxation as such. Tax is paid by the partners at the rates of tax applicable to them individually. | The company is not liable for tax. Tax is paid by the members at the rates applicable to them individually. | | Who manages the company? | Partners | 1) Members if it is a member-managed LLC,
or
2) An individually appointed manager if it is a manager-managed LLC. | | What happens on the death or incapacity of the owner/s? | Automatic dissolution, unless the contrary is provided by the partnership deed. | No consequences. | | Possibility of conversion into another form of business entity. | Conversion into a Limited Partnership, Corporation, or LLC is possible. | Conversion into a General Partnership, a Limited Partnership or a Corporation is possible. |
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