What is a partnership and how do I create one?

A partnership is a business owned by two or more people that hasn't filed papers to become a corporation or a limited liability company (LLC). You don't have to complete any paperwork to create your partnership -- the arrangement begins as soon as you start a business with another person.

Although the law doesn't require it, many partners work out the details of how they will manage their business in a written partnership agreement. If you don't create a written agreement, the partnership laws of your state will govern your partnership.

Are there special rules for running partnerships?

Unlike corporations, partnerships are relatively informal business structures. Partnerships aren't required to hold meetings, prepare minutes, elect officers, or issue stock certificates. Generally, partners share equally in the management of the partnership and its profits and losses, and assume equal responsibility for its debts and liabilities. These and other details are typically described in a partnership agreement.

How are partnerships taxed?

A partnership is not considered separate from its partners for tax purposes. Generally, this means the partnership itself does not pay any income taxes; instead, partnership income "passes through" the business to each partner, who then reports his or her share of business profits or losses on an individual federal tax return. Each partner will need to estimate the taxes he or she will owe at the end of the year and make four quarterly estimated tax payments to the IRS.

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