Forming a partnership is one of the easiest ways to create a business. In a partnership, you and any number of partners agree to be co-owners. As a result, any profits made from the business are divided amongst those partners. As with any corporate structure, there are benefits and disadvantages to forming a partnership. If you have decided to form a partnership, this section will tell you what you need to know about how they work, the taxes involved and how to get started.
A general partnership is an informal type of business structure, and is created when two or more people come together for the purpose of conducting business. In a general partnership structure, each party is equally responsible for the debts, liability and profits. If one partner makes a decision that puts the company in debt, for example, all of the other partners are equally responsible for that debt. However, individual liability can be an advantage during tax season. Profits from the general partnership are not taxed to a company. Rather, they are passed down to the partners, who can claim the profits on their individual tax returns.
Limited partnerships lend more protection to each of the partners involved. A limited partner is only liable up to the amount that he or she has invested into the business. One partner must be designated the general partner, and that person alone will bear the personal liability on behalf of the business. However, the general partner also holds decision-making power over the business while the other limited partners do not. Profits and losses are passed through to both the general and limited partners for tax purposes.
Limited Liability Partnerships
With a limited liability partnership, sometimes called an LLP, each of the partners personal liability is limited. The partners in an LLP are not responsible for each others debts and obligations, making it an attractive structure for professionals such as doctors, accountants and lawyers. While the partners may pass through profits from the LLP on their federal tax returns, some states prohibit that practice.
Downsides to a Partnership
While partnerships are easy to form and allow for a great degree of flexibility, there are some distinct disadvantages when compared to other types of corporate structures. One of the biggest drawbacks is the exposure to personal liability. If the partnership is sued for an outstanding debt, your personal assets, such as your house, car and savings, may be at risk. In some instances, a partner can unilaterally make business decisions that affect the other partners. Furthermore, if one of the partners passes away suddenly or decides to walk away from the business, the partnership is considered dissolved. As a result, the other partners could lose out on a potentially successful business. Also, one partners stake in the business cannot be transferred to another person unless each of the remaining partners consent to it. This means that even if you have a disagreement with one of your partners, you may be stuck working with them.
The Importance of Having a Partnership Agreement
If you enter into a partnership, having a partnership agreement in place can help provide clarity and prevent future problems. A partnership agreement is a document describing what each partner has contributed to the business and how the profits and losses will be allocated among the partners. You can also designate which of the partners will have the authority to make decisions on behalf of the business, enter into agreements or contracts on behalf of the other partners and manage the businesss finances. Your partnership agreement can also outline the terms for adding additional partners to the business or how issues will be handled when and if a person exits the partnership. By having all of these details organized before you start to do business, you can avoid unnecessary disputes. A partnership agreement give you control over your business. If you dont have one in place, your partnership may be subject to the default rules for partnerships in your state.Entering into a partnership can be an easy way to get a business off the ground. A partnership allows its owners to have great flexibility and the freedom to run their business as they see fit. Understanding what a partnership does, as well as its limitations, can give you confidence that you are choosing the right structure for your business.