The informal rules regarding the creation of a partnership are exactly why everyone should see an attorney before they attempt to engage in any type of business with another person. The ramifications of a partnership can be huge. If not correctly planned, each partner will be liable for the debts of the other partner when carrying on the business.
There are ways to mitigate and/or eliminate the risks involved with a partnership. There are two types of partnerships: general partnerships and limited partnerships (also called limited liability partnerships or LLPs).
In a general partnership, all partners are liable for the debts of the partnership. For this reason alone, extreme caution has to be taken when choosing a partner and conducting partnership business. Keep in mind that there are certain rules regarding formation of a partnership (it may be a lot easier than you think).
Two of the most attractive features that a partnership offers are its flexibility and its pass-through taxation. A partnership's flexibility allows its partners to set the rules as they see fit. There are numerous creative ways to set up internal rules particular to each partner.
The tax-through taxation implications of a partnership also allows its partners to avoid double taxation (something that many corporations, particularly, C corporations, cannot do). C corporations, unlike S corporations and partnerships, have to pay taxes separate and apart from its shareholders. This feature does not make it attractive to most people starting up their own businesses. But in a partnership, taxes are not paid by the partnership entity separately. The taxes "pass through" to the partners themselves. To determine how much profit and loss pass to its members, a legally trained mind is typically required to assess and effectuate the intent of the partners.
To avoid the pitfalls of a general partnership, seek assistance from NOSRAT | RAD prior to commencing any business with another person. If you think you already have a partnership and it has already ran into some trouble, give us a call and we will try to minimize or eliminate any personal liability towards you.