One recent study concluded that a new partnership is four times as likely to succeed as a new sole proprietorship. Partners bring to a business more creativity, skills, capital base, and experience than any one person is likely to have. A partnership can have any numbers of partners.

Every partnership should have a written agreement (though there is no legal requirement to do so). The agreement should specify how the partnership will operate, how it will be financed, how responsibilities will be divided among the partners, how profits and losses will be shared and what happens to the partnership if one partner withdraws, becomes disabled, or dies.

A partnership files an information tax return (Form 1065), but pays no income tax itself. The income or losses are passed through to the partners who report them on their individual tax returns in shares agree upon by the partners - not necessarily equally. A partner, like a sole proprietor, pays self-employment tax on net income rather than social security taxes on wages.

A major drawback to a partnership is that liability is unlimited. In fact, partners can be held liable for the actions of fellow partners.

Partners have similar options in the area of fringe benefits and retirement plans as those available to sole proprietors.

Limited partnership. In a limited partnership, a general partner or partners run the business and are fully liable for partnership obligations. Limited partners do not participate in the business and are generally liable only to the extent of their investment.