Partnerships have similar features to the sole proprietor entity type, with one major difference. It’s a fairly obvious difference and is simple as the name implies. A partnership has the same features as a sole proprietor, only it requires at least one partner.
If you go into business with another person, you assume the role of a partnership. As in a sole proprietorship, you have unlimited liability. Not only do you have the unlimited liability, but your partners do as well. If something goes terribly wrong in the working of your business, it is possible that your assets could be taken away, as well as those of your partners. Even personal things that are not associated with your business can be taken away from you. Having unlimited liability is undertaking a tremendous risk.
An upside to a partnership is that it is a ‘pass through’ entity. So any business expenses and losses can be tax deductible. On the same token, the money that your partnership makes is not taxed until it is in your personal hands.
Just as the sole proprietor can go into business by simply deciding to go into business, as partnership can be created just as easily. It doesn’t even require a handshake, but it could if you wanted it to.
The partners are bound to each other by a general ‘good faith’ agreement at the beginning, meaning that they will each work towards the goals of the group without trying to benefit themselves personally above anyone else in the partnership.
If the members of your partnership wanted a clearer set of rules to do business with, then you can set up a partnership agreement. This would define things such as your interests, your goals, and how members can leave or join. There are a million different things to consider in your partnership, and the agreement is a written (or oral in some cases) place to address these issues.
If one of the partners wants out (and can do so legally according to the partnership agreement), the partnership is dissolved and a new one with the remaining partners is automatically created.