A partnership business entity is a business owned by two or more people who share profits, losses, and management, with the business itself paying no income tax; the income passes through to the partners’ personal returns. U.S. law recognizes three main forms: the general partnership, the limited partnership, and the limited liability partnership. Which one you pick controls how much personal risk each partner carries, who gets to run the business, and, in some cases, how each partner is taxed on their share of the profits.
Partnership law is mostly state law. Most states base their rules on the Revised Uniform Partnership Act, which governs general partnerships and LLPs in roughly 44 states, or on the Uniform Limited Partnership Act, which covers LPs.
The Three Types of Partnerships
General Partnership
A general partnership is the simplest form and the easiest to fall into by accident. Two or more people agree to run a business together, and every partner has an equal right to manage operations and share in the profits. No written agreement is required. If two people start doing business together with the intent to share profits, the law treats them as general partners whether they realized it or not. That default status is why a written partnership agreement matters so much: without one, state statute fills in every gap, and its defaults rarely match what the partners actually intended.
Limited Partnership
A limited partnership has at least one general partner who runs the business and one or more limited partners who put in capital but stay out of daily management. Limited partners function more like investors. They contribute money, share in profits, and their financial risk is capped at the amount they put in.
Under the original Uniform Limited Partnership Act, a limited partner who got too involved in management could lose that liability protection. The 2001 revision eliminated that “control rule” entirely, bringing limited partners into parity with LLC members and corporate shareholders. Not every state has adopted the update, so the old rule still applies in some places.
Limited Liability Partnership
LLPs are a favorite of professional service firms such as law practices, accounting firms, and medical groups. Every partner can participate fully in management, and each one is shielded from personal liability for the malpractice or negligence of the other partners.
The shield has real limits. A partner is still personally liable for their own wrongful conduct and for the mistakes of anyone they directly supervise. Partners can also lose protection by personally guaranteeing partnership debts or by voting to waive the liability shield in the partnership agreement. Some states draw a line between tort and contract liability, protecting LLP partners only from tort claims while leaving them exposed on contract debts like leases or vendor agreements.
Personal Liability by Partnership Type
Liability is the single biggest reason to care which type you pick. In a general partnership, every partner faces joint and several liability for all business debts. A creditor with a judgment against the partnership can go after any one partner’s personal bank accounts, real estate, and other assets to collect the full amount owed. It doesn’t matter whether that partner caused the problem or even knew about it.
Limited partners in an LP get the best protection. Their exposure is capped at whatever capital they contributed. If the business fails with $500,000 in debt and a limited partner invested $50,000, that $50,000 is the most they can lose. The general partner in the same LP, however, carries the same unlimited personal exposure as partners in a general partnership.
LLP partners sit in the middle. They are protected from the negligent acts of their fellow partners, but not from their own mistakes, their own supervisory failures, or debts they have personally guaranteed. The specifics depend on state law, so check your state’s version of the statute before assuming you’re fully covered.
How Partnerships Are Taxed
Partnerships are pass-through entities for federal income tax purposes. The business itself does not pay income tax. Profits and losses flow through to the individual partners, who report their share on their personal returns. This avoids the double taxation that hits C corporations, where the business pays corporate income tax and shareholders pay again on dividends.
The partnership must file Form 1065 with the IRS each year. It is an informational return documenting the business’s total income, deductions, and credits. For calendar-year partnerships, the return is due March 15. An automatic six-month extension is available by filing Form 7004, pushing the deadline to September 15. Each partner then receives a Schedule K-1 breaking out their individual share of income, losses, deductions, and credits, which they use to prepare their personal returns.
The Qualified Business Income Deduction
Partners may also benefit from the Section 199A qualified business income deduction, which allows eligible taxpayers to deduct up to 20 percent of their qualified business income from a partnership. The deduction was originally set to expire after December 31, 2025, but was made permanent by legislation signed in 2025. It phases out for higher-income taxpayers and is subject to limitations based on the type of business, W-2 wages paid by the partnership, and the cost basis of the partnership’s qualified property.
Self-Employment Tax and Quarterly Payments
Because no employer is withholding taxes from a paycheck, general partners owe self-employment tax on their share of partnership income. The combined rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare. The Social Security portion applies only to the first $184,500 of combined earnings in 2026. Medicare has no cap, and an additional 0.9 percent Medicare surtax kicks in once income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.
The IRS expects quarterly estimated tax payments to cover this liability. Due dates are April 15, June 15, September 15, and January 15 of the following year. Missing them triggers an underpayment penalty that accrues interest, even if you pay everything you owe when you file your annual return.
Limited partners generally owe self-employment tax only on guaranteed payments (a set salary-like amount), not on their share of partnership profits. That treatment is one of the LP structure’s tax advantages.
What It Takes to Form One
A general partnership needs no state filing to exist. It comes into being the moment the partners start doing business together. Limited partnerships and LLPs must file a certificate of formation or registration with the Secretary of State or equivalent agency, listing the business name, principal office address, general partners or designated agent, and the partnership’s purpose. Filing fees range from nothing in a handful of states to several hundred dollars in others. If the partnership plans to operate in more than one state, it must register as a foreign partnership in each additional state.
Whatever the type, the partnership agreement is the most important document in the formation process, and plenty of partnerships skip it. Without a written agreement, every aspect of the relationship defaults to state statute, which assumes equal profit-sharing, equal management authority, and no restrictions on partner withdrawal. A workable agreement covers, at minimum, each partner’s capital contribution, how profits and losses are split, who has authority to make which decisions, what happens when a partner wants to leave, and how disputes get resolved. Oral agreements are technically enforceable in most states, but proving their terms in court is expensive and uncertain.
Every partnership also needs an Employer Identification Number from the IRS. The nine-digit number functions as the business’s tax ID and is required to open a business bank account, hire employees, and file the annual return. You can apply online at irs.gov and receive it immediately at no cost. The IRS recommends forming your entity with the state before applying, since applying too early can delay the process.
When a Partner Leaves
Modern partnership law draws a line between a partner leaving and the business shutting down. Under the Revised Uniform Partnership Act, a partner’s departure is called dissociation. Any partner has the right to dissociate at any time, though doing so in violation of the partnership agreement can create liability for damages. Removing a partner involuntarily is allowed only if the partnership agreement authorizes it.
Dissociation does not automatically end the business. In a partnership with a fixed term or a specific purpose, the remaining partners can choose to continue. But in a partnership at will, where no term is specified, any partner’s dissociation triggers dissolution by default. Dissolution begins the winding-up process: finishing existing business, collecting debts owed to the partnership, liquidating assets, and distributing what remains.
The payout order during winding up is fixed. Outside creditors get paid first. Then partners are repaid for any loans they made to the partnership. After that, partners receive their capital contributions. Whatever is left is divided according to each partner’s share of profits. If the assets are not enough to cover all obligations, general partners are personally responsible for the shortfall. A buyout clause in the partnership agreement, spelling out how a departing partner’s interest is valued and paid out, can prevent a forced liquidation that destroys the business’s going-concern value.