What Is an Active Partner in Business?

What defines an active partner in a business may seem self-evident, but there are legal consequences and liabilities depending on the role a person plays in a partnership.

General partnership

Active partners, described by the IRS and the Small Business Administration as a "general partnership" divide responsibilities for managing a business, and share the business's liabilities.

Sharing profits

General partners are assumed to share profits or loss equally unless they have a written agreement that states differently.

Limited partners

A limited partner means his liabilities in the business only relates to the extent of his investment. A limited partner's input into management is also limited.

Taxes

A partnership does not pay taxes as a business, but must file an informational return. Each general partner reports her share of profits and losses on a personal return.

Forming a Partnership

A general partnership is easy and inexpensive to form, but it does require an agreement between the active partners to own and operate a business jointly. Forming a limited partnership is more formal, and more complex.

References

• Small Business Administration: Forms of Ownership
• U.S. Internal Revenue Service: Partnerships