Financial Word of the Day: Partnership

Larry Jones
Jul 11
2 min read

Updated: Jul 14

Introduction

A partnership is like a business marriage—two or more people agree to join forces, pool resources, and share in both the profits and responsibilities of running a business. Unlike a corporation, a partnership is not a separate legal entity, which means the partners are personally liable for the business’s debts and obligations (unless it’s set up as a limited partnership).

Definition of Partnership

A partnership is a business structure where two or more individuals (or entities) manage and operate a business in accordance with agreed-upon terms.

Types of Partnerships

General Partnership (GP) – All partners share equally in management duties and liabilities.
Limited Partnership (LP) – One or more partners have limited liability and no management role, while general partners handle operations and take on liability.
Limited Liability Partnership (LLP) – Popular with professional firms (like lawyers or accountants), LLPs protect partners from the malpractice of their colleagues.

Why Partnerships Matter

Partnerships are a common way to start a business because they’re simple to set up and allow individuals to share startup costs, expertise, and workload. But they also require a lot of trust—because if your partner racks up debt, you could be on the hook.

In Real Life

Imagine Lisa and Mike want to start a coffee shop. They form a general partnership. Lisa brings her barista skills; Mike handles finances. Profits and losses are split 50/50. But if the business takes out a loan and fails, both Lisa and Mike are personally responsible for repaying it—even if one partner wasn’t involved in the decision.

Savvy Tip

Always draft a partnership agreement (yes, even if it’s your best friend). This document should outline:

Ownership percentages
Roles and responsibilities
How profits/losses are divided
What happens if one partner wants out

Without this, disagreements can get messy fast—and the only winners will be the lawyers.

Conclusion

Think of partnerships like financial power tools: great when handled carefully, but dangerous if used recklessly. If you’re considering one, understand your level of liability, communicate clearly, and make sure everything’s in writing.