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The Partnership

A partnership is similar to a sole proprietorship but has two or more owners. Like the sole proprietorship, the partnership is not a separate legal entity from its owners. Also like a sole proprietorship, you don’t have to file papers with the state to form a partnership. You should, however, create and adopt a partnership agreement. A partnership agreement outlines the arrangement between the partners for running the business and dividing the profits.
You don’t have to adopt a partnership agreement, but doing so will help settle arguments before they begin.

Advantages & Disadvantages
In general, the partnership shares the same advantages and disadvantages as the sole proprietorship. However, the partnership has an additional drawback. A partner can be held liable for the acts of the other partners, thus increasing each partner’s personal liability. For example, if Brent and Irene are partners and Brent incurs a debt on behalf of the partnership, Irene is also liable for the debt even if she knows nothing about it.

Taxes
Tax treatment of the partnership is also slightly different. Although it is a pass-through entity, the partnership does file an “informational” tax return (Form 1065) with the IRS showing its income and expenses. The pro-rata share of partnership profit or loss is then shown on each partner’s personal return. The partners pay any taxes due on their personal tax returns. Conversely, if the company loses money, the partners will share a deduction on their personal returns.

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