Partnerships

A partnership is often viewed as a group of two or more sole proprietors. Like a sole proprietorship, a partnership often does need not fill out any paperwork with the government in its formation, but it is advisable to create a written agreement between the partners. Just like any association, whether personal or business, the relationship among partners is subject to problems and potentially, an end to the partnership. For this reason, t is important that each partner to protect him or herself by defining the terms of the partnership in writing. This should, at a minimum, include the distribution of responsibilities and profits, as well as a plan of action if one of the partners dies or decides to leave.

There are two main types of partnerships, general and limited. Absent an agreement stating otherwise, a general partnership divides the profits and control of the business equally among the partners. The partners are jointly and severally liable for all debts and liabilities of the business. This also means that a partner can be held fully liable for the wrongdoings of his or her partner. Further, each partner is considered an agent of the partnership, so all of the partners can be held responsible for fulfilling the obligations that a partner may have entered into with a third party. Due to this unlimited liability, not only for your own acts but the acts of partners most business owners today seek to reduce risk through the use of same limited liability entity in the relationship or transaction.

With the unlimited potential for liability, many individuals choose to only be limited partners, thus forming a limited partnership. They are only responsible for the amount of capital that they have invested in the business. A limited partner invests capital and shares in the profits of the business, but does not participate in its running. A limited partnership must still have one or more general partners who are fully liable. Limiting the liability of certain partners, though, encourages investment for the business. A limited liability partnership (LLP) allows limited partners to take an active role in the partnership without being subjected to liability for other partners' acts. Many law and accounting firms now operate as LLPs.

Advantages:

• Ease of formation and operation.
• Permits ownership by more than one person.
• Partnership losses can be used to reduce a partner's taxable income.
• Ability to pool skills and resources of multiple partners.
• Avoids double taxation.

Disadvantages:

• Unlimited personal liability for general partners.
• Partnership ends if one of the partners leaves or dies.
• Difficult to buy or sell partnership interests-partnership agreement would have to be rewritten to reflect the change.
• Sometimes compromises among partners can be difficult to reach (another reason for a partnership agreement).
• General partnership interest may not be sold or transferred without consent of all partners.
• Partnership dissolves upon death of general partner.

Conclusion

The type of business structure that you decide to use greatly affects the amount of liability that you will face as well as how you will pay taxes. An attorney would is an excellent resource to help you fully understand various partnership types and help you implement one.