Partnership: Types, How It’s Taxed, and How It Compares to an LLC
Last updated 05/18/2026 by
Ante Mazalin
Edited by
Andrew Latham
Summary:
A partnership is a business structure in which two or more individuals share ownership, profits, losses, and management responsibilities, with income taxed directly on each partner’s personal return rather than at the business level.
The type of partnership determines how much personal liability each partner carries.
- General partnership: All partners share equal management authority and carry unlimited personal liability for the business’s debts and legal obligations.
- Limited partnership (LP): Has at least one general partner with unlimited liability and one or more limited partners whose liability is capped at their investment amount.
- Limited liability partnership (LLP): Protects partners from personal liability for other partners’ negligence or misconduct, commonly used by law firms and accounting practices.
- Pass-through taxation: The partnership pays no income tax itself; profits and losses flow through to partners’ personal returns via Schedule K-1.
Partnerships are one of the oldest and simplest business structures, but the liability exposure in a general partnership can be significant. Choosing the right type and having a solid partnership agreement in place before opening for business prevents most of the disputes that break partnerships apart.
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How a partnership works
A general partnership is formed automatically when two or more people carry on a business together for profit, even without a formal written agreement or state filing. Each general partner has the authority to bind the partnership to contracts and is personally liable for all partnership debts, including debts created by other partners.
Limited partnerships and LLPs require formal state registration. An LP must file a certificate of limited partnership, and an LLP must register with the state and typically pay annual fees to maintain the liability protection.
Regardless of type, all partnerships file an informational tax return (Form 1065) with the IRS each year. The partnership itself pays no federal income tax. Instead, each partner receives a Schedule K-1 showing their share of income, deductions, and credits, which they report on their personal return.
Partnership types compared
| Feature | General Partnership | Limited Partnership | LLP |
|---|---|---|---|
| State registration required | No | Yes | Yes |
| Personal liability | Unlimited for all partners | Unlimited for general partners; capped for limited partners | Protected from other partners’ negligence |
| Management rights | All partners equally | General partners only; limited partners cannot manage | All partners equally |
| Pass-through taxation | Yes | Yes | Yes |
| Common uses | Small informal businesses | Real estate investment, private equity | Professional practices (law, accounting, medicine) |
Pro Tip
Never operate a general partnership without a written partnership agreement, even between close friends or family members. The agreement should specify how profits and losses are divided, how decisions are made when partners disagree, what happens if a partner wants to exit, and what triggers dissolution. Without one, state default rules apply — and they rarely match what partners actually intended.
Partnership vs. LLC vs. sole proprietorship
The three most common structures for small businesses differ in how they handle liability, taxation, and management.
| Feature | General Partnership | LLC | Sole Proprietorship |
|---|---|---|---|
| Minimum owners | 2 | 1 | 1 |
| Personal liability | Unlimited | Limited (if formalities maintained) | Unlimited |
| Taxation | Pass-through (Schedule K-1) | Pass-through by default | Pass-through (Schedule C) |
| Formation requirement | No filing required | State filing required | No filing required |
For most multi-owner businesses, an LLC provides the same pass-through tax treatment as a partnership while adding personal liability protection that a general partnership does not offer. A sole proprietorship is the single-owner equivalent of a general partnership, with no liability protection and no formal filing requirements.
Partnership taxation
Partnerships are classic pass-through entities. The business files Form 1065 to report total income and expenses, but pays no tax at the entity level. Each partner’s share of the profit or loss is reported on Schedule K-1 and included on their individual Form 1040.
Partners pay self-employment tax on their share of active business income — currently 15.3% on the first $168,600 of net earnings and 2.9% above that threshold, according to the IRS. This covers Social Security and Medicare contributions that an employer would otherwise withhold.
Limited partners generally do not pay self-employment tax on their distributive share because they do not actively participate in management, though IRS rules on this distinction continue to evolve.
Good to know: Partners can contribute different types of capital — cash, property, or services — and the partnership agreement can allocate profits and losses in any ratio the partners agree upon, even if it differs from their ownership percentages. This flexibility is one reason limited partnerships are common in real estate investment and private equity structures.
Related reading on business structures
- LLC — covers the limited liability company structure, which provides the pass-through tax benefits of a partnership combined with personal liability protection that general partnerships lack.
- Sole proprietorship — the single-owner equivalent of a general partnership, with no formal filing requirements and unlimited personal liability for business debts.
- Balance sheet — explains how partnership assets, liabilities, and each partner’s capital account are recorded and reported in the business’s financial statements.
Frequently asked questions
How is a partnership taxed?
A partnership itself pays no federal income tax. Instead, each partner’s share of the business’s profits and losses flows through to their personal tax return via Schedule K-1. Partners pay income tax at their individual rates and also owe self-employment tax on their active income from the business.
What is the difference between a general partner and a limited partner?
A general partner has unlimited personal liability for the partnership’s debts and obligations and has the right to manage the business. A limited partner’s liability is capped at the amount they invested, but they cannot participate in management without risking losing their limited liability status.
Do partnerships need a written agreement?
No state requires a written partnership agreement to form a general partnership, but operating without one is a significant legal risk. Without a written agreement, disputes about profit sharing, decision-making authority, and exit terms are governed by default state rules, which may not reflect what the partners intended.
Can a partnership have employees?
Yes. A partnership can hire employees who are not partners, withhold payroll taxes, and provide benefits just like any other business entity. Partners themselves, however, are not employees of the partnership — they receive a distributive share of profits rather than wages.
What happens when a partner leaves or dies?
Under default rules in most states, the departure or death of a partner can trigger dissolution of the partnership. A well-drafted partnership agreement addresses this by specifying buyout procedures, valuation methods, and whether remaining partners can continue the business. Without these provisions, unwinding the partnership can be costly and contentious.
Key takeaways
- A partnership is a pass-through business structure where two or more owners share profits, losses, and management, with income taxed on individual returns.
- General partnerships require no state filing but carry unlimited personal liability for all partners.
- Limited partnerships and LLPs require state registration and offer varying degrees of liability protection depending on the partner’s role.
- All partnerships file Form 1065 annually; each partner receives a Schedule K-1 showing their share of income and deductions.
- A written partnership agreement is not legally required but is strongly recommended to govern profit sharing, decision-making, and exit procedures.
If your partnership is looking for business financing, compare loan and capital options at SuperMoney’s business financing reviews.
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