1. Profits don't have to be 50-50. You can be flexible on the distribution of profits, which is one quality that people like about partnerships. For example, in a two-person partnership, one partner could get 70% of the profit or loss from the partnership, while the other gets only 30%. Be aware, though, that these "special allocations" have to be in the partnership agreement. "Profits and losses are allocated between the partners as determined by the partnership agreement," says Arlene K. Mose, a certified public accountant in Walnut Creek, Calif. "If the partnership doesn't provide for this allocation, or there is no agreement, then the profits and losses must be distributed in accordance with the partner's interest in the partnership."

2. Ya gotta have it on paper. Not having a written partnership agreement is a big mistake. "Partnership tax law is right on the top of the list in terms of complexity," Mose says. For example, if you are allocating profits using a ratio that differs from the partners' interest in the partnership, as in the above example, "there needs to be accurate tracking of the partners' capital accounts. That means tracking the partners' contributed property, contributed money, increased by profits, decreased by losses, decreased by distributions, etc.," Mose says. "Tracking the partners' capital account balances is critical — I advise partnerships to outsource this work to someone who knows what they are doing."

3. There's no liability protection. A big downside of partnerships is the potential liability each partner has for the actions of another. Each partner is personally liable for all of the liabilities of the partnership. There's none of the protection from creditors that might apply if you are the owner of a corporation. In its simplest form, this means that if one partner goes out and has the partnership buy a new Jaguar, all the partners are responsible for the loan on that Jaguar. (I'll leave aside the question of who gets to drive the car.) The message should be clear: If you're going to operate as a partnership, choose your partners carefully.

4. No payroll is needed for partners. In at least one way, a partnership is simpler than a corporation: Corporations usually have to pay wages to shareholders who work in the business and are subject to all the quarterly and annual filing requirements for employers. But payroll isn't required for the partners in a partnership. So if a partnership has no employees — the only people working on behalf of the partnership are the partners — then the paperwork requirements can be less than for a corporation. Warning: There's no loophole here, guys — this does not mean that partners don't have to worry about taxes on their distributions from the partnership! In fact, general partners have to pay self-employment taxes as well as income taxes on their full share of ordinary income from the partnership. Again, the income and taxes are reported on the partners' personal tax returns.

5. There are some tax benefits. The tax treatment of partners' distributions is similar to the tax on sole proprietors' net profits. Again like sole proprietors, general partners can deduct 60% of their medical insurance payments and qualified long-term care payments from their taxable income. If a partner incurs out-of-pocket expenses and the partnership agreement says that the partner is to pay those expenses, then those expenses may be deducted on the partner's personal tax return. Partnerships don't pay federal income taxes, but you'll still have to file a return for the partnership. Form 1065, U.S. Return of Partnership Income, is used to report partnership revenues and expenses and gains and losses. The profits and losses are reported on the individual partners' personal income tax returns. Partnership returns have to be filed by the 15th day of the fourth month following the close of the tax year. For most partnerships, that translates to an April 15 requirement.