Partnerships are arrangements in which two or more entities decide to work together. A partnership is an agreement in which parties, termed as business partners, agreed to work together to further their mutual financial interests. The partners in a venture may be private people, corporations, non-profit organizations, schools, government or combinations of individuals. In any case, in order for the partnership to be valid, the following conditions must be met: the parties to the partnership have market enough, have similar, and complementary skills and experience, and have the will to carry out the partnership’s objectives.
Most partnerships to create value for their participants. But if profit is the driving force behind the formation of the partnership, the creation of value depends on how well the venture markets its products or services. Creating value may also take into account the extent to which the partners in the partnership can carry out their responsibilities as partners. A successful partnership will add to the wealth of the investors through dividends, capital gains, or other means, and the partners will share in the profits created by the venture.
Taxation of partnerships has become a controversial issue. Many partnerships formed in the past have been subjected to double taxation. Partnerships that have resulted in taxable profits are obliged to pay corporate income taxes to the federal government and their own personal taxes to their state governments. Some partnerships have opted to file a single tax return and pay the corporate tax to the individual members of the partnership and not their employers, thereby avoiding the corporate and personal tax liability. Sometimes partnerships incorporate themselves and become subject to state taxation.
There are four types of partnerships in modern society. The first, pass-through taxation, is in effect in small business structures where profits pass through the hands of the owners directly to their respective corporations and pass through the corporate tax structure, paying either the corporation taxes or the individual income tax. This form of taxation results in higher personal taxes for the partners. Two types of pass-through taxation exist: direct and indirect. Direct partnerships (in which there is no franchise tax) are usually the most common form of partnership.
Indirect partnerships (also called “ltd”) are formed between two independent directors in which liability is transferred between the entities. In this type of partnership, neither entity is liable for its liability to another entity. Indirect partnerships may also be limited liability partnerships (LLPs). An LLC is different from an LLD because it is formed as a separate company in which there is no minimum equity requirement and there are usually no restrictions on the transfer of ownership. An LLC can also be structured to contain more than two partners.
One of the most common forms of partnership is a general partnership. A general partnership agreement contains the name of the partnership, the partners involved in the partnership, the nature of the partnership, the debt and assets of the partnership, and other provisions. All general partnership agreements have clauses that require distribution of dividends to partners. This distribution is done according to the rules of the partnership agreement. After distribution of dividends, there is generally no requirement that the partners share their profits with each other or with anyone else.