Defining a Partnership:
You may like the simplicity of a sole proprietorship as discussed last week, but what if you want to own a business with someone. Is there is another option? Yes, you can structure your business as a partnership. A partnership is when two or more people share in the ownership of a single business.
This basically consists of each partner sharing in the responsibility of funding the business, getting equipment and any inventory, providing or obtaining skilled workers and all aspects of management. Partners also share in the profits and/ or losses of the business just like a sole proprietor does.
Partnerships tend to work best if an agreement is drawn up, preferably by a lawyer, which details and delegates every aspect of the business’ operation.
The three common partnerships are General, Limited, and Joint Ventures Partnerships. Within the scope of a General Partnership, normally all partners share equally in the profits and liabilities while exercising equal management responsibilities. If you choose not to use equal distribution in any area, whatever percentages decided upon needs to be included in the agreement.
The Limited Partnership is a little more involved than the General Partnership because it limits partners’ participation in management decisions. It can be viewed as a blessing in disguise since it also limits the liabilities of the partners. The limits are factored by the percentage of investment from each partner.
The last type of partnership is the Joint Ventures. This type of partnership is usually temporary and is established based on need. Two or more businesses join their resources and expertise on a short-term project or goal. For example, a small company has a great new product and teams up with an established marketing firm to land contracts with companies on the marketing firm’s distribution list. Once the goal is reached the partnership is dissolved. Both businesses profit financially.
Forming a Partnership:
As with any business structure, you will need to establish a business name. Partnership agreements require your legal name or the last names of all partners involved. If you decide against using all partners’ legal names, the trade name must be filed, and the business must be registered in the state the business will be conducted in. There isn’t any paperwork needed to form a partnership.
Licenses and permits may be required for your line of work. Partnerships require a tax ID number. The business is not taxed, but the profits and losses of the business are the responsibility of the partners and filed on their personal tax returns.
Pros and Cons of Partnership:
Forming partnerships are not only inexpensive they are easy. Everyone involved is responsible for the success and liabilities of the business. The chance of obtaining business funding is doubled by a number of partners.
Drawbacks include disagreements on how the business is run, and how responsibilities and profits are divided up based upon the percentage of investment.
Forming a partnership takes careful consideration and should not be something rushed into. Do not hesitate to seek legal counsel for more specifics regarding General, Limited, and Joint Ventures Partnerships.