If you are in the process of starting a business, you are likely giving a lot of thought to the form that your business should take. A partnership is often convenient for small business purposes. There are several types of partnerships, each with its own benefits and disadvantages. Understanding the main facts about each type of partnership is important to making the right decision for your company. The answers to the following frequently asked questions can provide you with some basic information and give you an overview of relevant facts.
1. Question: How Is a Partnership Different from a Corporation?
The main difference between a partnership and a corporation is the question of personal liability. While a corporation is an independent legal entity separate from its officers and shareholders, in a partnership the legal privileges and responsibilities are shared among individual partners. As a partner, you may be personally responsible for the partnership’s liabilities. On the other hand, a partnership has the advantage of being easier to form and dissolve, requiring far less expense and paperwork. Partnerships also offer more flexibility in terms of rules and business operations.
2. Question: What Types of Partnerships Are There?
Partnerships may be general or limited, or may constitute a joint venture. A general partnership typically consists of several partners, each of whom shares equally in the responsibilities of running the business as well as in its profits. A joint venture is basically a general partnership that is formed for a specific purpose. Typically, a joint venture will be set up either for a limited period of time or to complete a particular project.In a limited partnership, there will be several partners, each with a specific and distinct role. In addition to active partners who actually run the business, this type of company will also have limited partners whose role chiefly consists of investing money. Limited partners generally have very little to no input into the company’s operations and business decisions. As such, their liabilities may also be less than those of active partners.
3. Question: How Complicated Is It to Form a Partnership?
One of the advantages of a partnership is the relative ease of creating it. Technically, you do not need to file, or even draw up, any type of paperwork in order to form a partnership. All that is required is that you operate as one. This means that is your business is run by two or more people who share profits and losses and each have the power to make major decisions, it can be legally considered a partnership. This can be the case even when you do not actually intend to form a partnership. If you represent yourself as a partnership to the public, you may be legally deemed as such for purposes of liability and taxation.The only time you need writing to form a partnership is when you want to create a limited partnership. In this situation, you are required to have a document stating that the limited partner has put money into the business and does not have control over the company’s management. Such a writing is necessary if proof is ever needed in order for the limited partner to be protected from liability stemming from the partnership’s activities.Even though you may form a general or joint venture partnership without anything in writing, it is prudent to have an agreement that sets out some basic ground rules as to profit sharing, decision-making and business goals. Having such a document can help you avoid internal disputes and tailor your business operations more closely to your company’s specific needs.
Many small business owners prefer to form partnerships due to the great flexibility they provide for creating and running a company. Partnerships let you avoid cumbersome paperwork and expensive filing fees. On the other hand, a partnership can potentially leave individual partners exposed to liabilities that a corporation would protect them from. Learning the basic characteristics of a partnership can be the first step to helping you decide if this business form works best for your company.
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