A general partnership is an association of two or more persons to carry on a business for profit. This form of business organization is ordinarily created by formal agreement, but a partnership may simply be created by oral agreement or may even be implied by the conduct and acts of the parties. Matters covered by a written partnership agreement will often be controlled by state laws, which provide certain rules for the operation of a partnership, its termination and the rights of creditors against the partners.
A partnership, like a sole proprietorship, is not a taxpayer. However, unlike a sole proprietorship, a partnership must file an informational return annually with the IRS. The profits (and losses) then “pass through” to the individual partners for inclusion on their personal returns and taxation at individual rates. In the absence of language in the partnership agreement to the contrary, a partner will be taxed on his or her proportionate share of partnership profits, not on his or her draw.
A partnership, like the sole proprietorship, is a business form with unlimited liability for the partners. This means that each partner’s assets can be reached without limitation to satisfy partnership obligations incurred by the other partners. Partnership creditors do not have to attempt to collect from the various partners proportionate to their interests in partnership capital or profits – all of the debts can be collected from any one of the partners.