Partnership

A partnership is a US business entity owned by two or more people who agree to operate a business together. The variants are distinguished primarily by liability structure: general partnership (GP, all partners share full personal liability and equal management authority by default), limited partnership (LP, one or more general partners with full liability plus one or more limited partners with passive investment status and limited liability), and limited liability partnership (LLP, all partners get liability protection from each other's malpractice, primarily used by professional services firms). It is the structure most commonly used today by venture capital funds, law firms, accounting firms, and similar professional partnerships, and rarely the right structure for operating businesses, which mostly use LLCs or C-corps instead.

The three main variants:

• General Partnership (GP): All partners have unlimited personal liability for partnership debts; each partner can bind the partnership; pass-through taxation. Largely a default category for two or more people doing business together without forming any other entity. Almost always the wrong choice for any business with liability exposure because every partner is on the hook personally.
• Limited Partnership (LP): Has at least one general partner with unlimited liability and at least one limited partner whose liability is capped at their investment. Limited partners can't actively manage the business without losing their limited liability status. This is the structure of most venture capital funds, private equity funds, and hedge funds: the GP is the management firm, the LPs are the institutional investors.
• Limited Liability Partnership (LLP): All partners have liability protection from the malpractice or negligence of other partners. Primarily used by law firms, accounting firms, architecture firms, and similar professional-services partnerships. Available in most US states with varying rules about which professions can use the structure.

The 2020s reality: partnerships have largely been displaced by LLCs for operating businesses (because LLCs offer the same pass-through tax treatment with cleaner liability structures), and partnerships now concentrate in two specific use cases: investment funds (LP structure) and professional services firms (LLP structure). Forming a general partnership accidentally (by doing business with someone without any agreement) is one of the more common small-business legal mistakes.

What founders get wrong: Accidentally forming a general partnership by doing business with a co-founder without any written agreement or formed entity. The IRS and most states treat two or more people operating a business together as a default general partnership, with all the liability consequences that implies. If you have a co-founder, form an LLC or C-corp immediately; don't leave the default partnership structure operating.

Related: LLC · Sole Proprietorship · C Corporation

FAQ

What is a partnership?
A US business entity owned by two or more people who agree to operate a business together. Variants include general partnership (GP, full personal liability for all), limited partnership (LP, mix of full and limited liability), and limited liability partnership (LLP, all partners get protection from each other's malpractice).

What's the difference between LP, GP, and LLP?
GP: all partners have unlimited personal liability; each partner can bind the partnership. LP: at least one general partner with unlimited liability plus limited partners with passive investment and limited liability (this is the structure of VC and PE funds). LLP: all partners have protection from other partners' malpractice; used by law and accounting firms.

Why are partnerships rare for operating businesses today?
Because LLCs offer the same pass-through tax treatment with cleaner liability structures. Operating businesses have largely shifted from partnerships to LLCs. Partnerships now concentrate in investment-fund structures (LPs) and professional-services firms (LLPs). Accidentally forming a general partnership (two people doing business without an agreement) is a common and dangerous mistake.