In a partnership, two or more people share ownership of a single business and are generally liable for the partnership debts. The earnings and profits of a partnership are taxed at the owner's individual level. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. It is hard to think about a "break up" when the business is just getting started, but many partnerships split at times of crises, and unless there is a defined process, there will be even greater problems. They also must decide up front how much time and capital each will contribute, etc.

In some ways, a partnership is treated as a separate legal entity because it can own property and execute documents. However, for certain issues such as life span, liability and taxation, the partners are looked to directly, almost as though there is no separate legal entity.

No legal formalities are necessary to create a partnership, other than appropriate licensing to conduct business and registration of a business name. However, most partnerships develop a written agreement that defines each partner's share of ownership and other issues, such as the ability to transfer partnership interests.

Unless the partnership agreement specifies otherwise, a partnership is dissolved at the retirement, disability, death or consent of any partner. As a result, a partnership lacks "business continuity" and does not have a "perpetual life."

A transfer of partnership interests during lifetime dissolves the partnership unless the remaining partner(s) agree(s) to the new partner. A partnership is also automatically dissolved if one of the partners dies, unless the partnership agreement specifies otherwise and/or the remaining partner(s) agree(s) to continue.

Management control is completely in the hands of the partners. There are no shareholders or board of directors to answer to.

Unless a limited partnership is involved, each partner is personally liable for the debts and other business liabilities of the partnership. As a result, the personal assets of each partner are exposed to these liabilities. Even with a limited partnership, there must be at least one partner (the general partner) who has potential personal liability.

A partnership is not a separate taxable entity. The net profits or losses of the partnership pass through to the partners. A partnership can deduct the cost of employee benefits as a business expense. However, partners are generally not considered employees for income tax purposes. Finally, income and appreciation can be shifted to other family members by making them partners of the business.

Relatively easy to form, operate and terminate; simple method of taxation—income and losses pass through to partners; general partners have unlimited management control; ability to shift income and appreciation to others.

Unlimited liability for debts and liabilities of partnership; lack of continuity—that is, when a partner leaves, partnership dissolves unless agreed upon otherwise; lack of ability to use tax advantages of certain benefits, such as group health, life and disability.

General partnership, limited partnership.