Definition of partnership
- began a legal partnership with his uncle
- the partnership computes its net income … in a manner similar to that of an individual
- —J. K. Lasser
- The band has maintained a successful partnership for 10 years.
two people joined in partnership
scientists working in partnership with each other
The company is developing a new car in partnership with leading auto manufacturers in Japan.
Their marriage is a partnership that has remained strong despite family illness.
The singing duo has maintained a successful partnership for 20 years.
a notable partnership between two experienced scientists in the field
He joined the partnership last year.
These example sentences are selected automatically from various online news sources to reflect current usage of the word 'partnership.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.
A partnership is a business structure in which the owners (partners) share with each other the profits and losses.
A partnership is organized to provide for proportional ownership of a company among the partners based on some type of formula or value of investment in the company. Partnerships pass along the profit (and losses) to its owners and offer tax advantages to the company. The partnership, itself, for example, does not incur taxes on its profits before the profits are distributed to the partners. Each partner in the partnership pays taxes on the distributions based on their individual tax rate. At the same time, with the liability shield of a corporation, partners may be exposed to a greater degree of personal liability in a partnership.
Additional forms of partnerships have been developed which limit the extent of partner’s liabilities. Limited partnerships which give partners protection from liability and, at the same time, limit their control of the company. A limited liability company gives some, but not complete protection from liability and allows the partners to maintain control over the company.
Also, not all partners are equal. General partners, for example, usually have direct control over the operations of a company. With that control, general partners have joint and several liabilities. Limited partners, on the other hand, have liabilities that are limited to their investment in the partnership.
In most legal systems, a partnership is a legal form of a company in which all partners, to some extent, are personally liable for its debts and obligations. Because the partnership itself does not pay income taxes, it passes that obligation to individual partners. As a result, partners are liable for taxes of the profits from their share of the partnership. Also, if it is applicable, partners must file estimated taxes on their share, showing income and deductions, on a quarterly basis.
Unlike a corporation, a master limited partnership is considered to be the aggregate of its partners rather than a separate entity. However, the most distinguishing characteristic of MLPs is that they combine the tax advantages of a partnership with the liquidity of a publicly traded stock.
MLPs allow for pass-through income, meaning that they are not subject to corporate income taxes. Instead, owners of an MLP are personally responsible for paying taxes on their individual portions of the MLP's income, gains, losses, and deductions. This eliminates the "double taxation" generally applied to corporations (whereby the corporation pays taxes on its income and the corporation's shareholders also pay taxes on the corporation's dividends).
MLPs make distributions that are similar to dividends, and these are generally paid out on a quarterly basis. It is important to note that cash distributions are not guaranteed, and every unitholder is responsible for the taxes on his or her proportionate share of income, even if the MLP does not pay a cash distribution.
Generally, investors can purchase MLP units from brokers. A unitholder's initial tax basis in MLP units is generally the amount he or she pays for the units. The unitholder's basis is usually then decreased with each distribution and allocation for losses or deductions, and the basis is increased for each allocation of income. A portion of certain distributions may qualify as a return of the investor's capital, thereby reducing the unitholder's taxable basis.
When an MLP pays more in distributions than it earns in taxable income, the unitholder's tax basis is decreased by the difference between the cash received and the MLP's taxable income. When the unitholder sells his or her units, any gain on the sale is taxed at the unitholder's ordinary income tax rate.
MLPs must mail an IRS Schedule K-1 to each of their unitholders every year. This Schedule K-1 reports the unitholder's allocated income, gain, loss, deduction, and credits. If the unitholder's taxable partnership income for the year is negative, then this is considered a passive loss under the tax code and may not be used to offset income from other sources. Instead, the passive loss may only be used to offset future income from the same MLP.
Although unitholders are generally limited in their liability, similar to a corporation's shareholders, creditors typically have the right to seek the return of distributions made to unitholders if the liability in question arose before the distribution was paid. This liability stays attached to the unitholder even after he or she sells the units.
The fact that master limited partnerships are not subject to income tax means that more cash is available for distributions than would be available had the company incorporated. This generally makes MLP units worth more than similar shares of a corporation.
The size of an MLP's cash distributions generally drives the value of its MLP units. With this in mind, it is particularly important for investors to carefully evaluate whether an MLP is able to meet its current distribution obligations and whether it will be able to continue (and possibly even raise) its future distributions. If a particular ir sports a distributable cash flow coverage ratio of 1:1, then this generally indicates that the MLP has adequate cash to meet its cash distribution requirements.
As a side note, the American Jobs Creation Act of 2004 added MLP income to the list of acceptable sources of income for mutual funds, with some conditions, including that mutual funds may not invest more than 25% of their assets in MLPs, nor may they own more than 10% of any one MLP.
Before you put a dime in MLPs, be sure to take the time to read one of our most popular articles on the topic: Master Limited Partnerships: A High-Yield Favorite for Growing Dividends. There you'll find more information about what to expect from these securities when you invest.
See words that rhyme with partnership Thesaurus: All synonyms and antonyms for partnership Spanish Central: Translation of partnership Nglish: Translation of partnership for Spanish speakers Britannica English: Translation of partnership for Arabic speakers Britannica.com: Encyclopedia article about partnership
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