A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. A partnership can have different types of partners - General Partners and Limited Partners. General partners, who invest in the partnership, participate in the day-to-day operations, and are liable for debts and lawsuits of the partnership. Limited partners, who invest in the partnership but who have no participation in day-to-day operations and who are not usually considered to have liability.
There are three relatively common partnership types: i) General Partnership (GP), ii) Limited Partnership (LP), and iii) Limited Liabilitity Partnership (LLP). A fourth, Limited Liability Limited Partnership (LLLP), is not recognized in all states.
General Partnership (GP)
A GP is a partnership with only general partners. Each general partner takes part in the management of the business, and also takes responsibility for the liabilities of the business. If one partner is sued, all partners are held liable.
Limited Partnership (LP)
A LP has at least one general partner and at least one limited partner. The general partner is responsible for managing the business affairs, while the limited partner typically provides only capital to the partnership. Similar to the general partnership, each general partner assumes full personal liability for the debts and obligations of the partnership. The limited partner’s liability is limited to their investment in the business.
Limited Liability Partnership (LLP)
An LLP is a form of ownership to persons license to practice in the fields of public accountancy, law, architecture, etc. All the LLP partners can take an active role in managing the day-to-day affairs of the business and receive limited liability protection. However, the LLP does not shield the partners for liability for their own malpractice.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return. Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 to the partners by the date Form 1065 is required to be filed, including extensions.