Partnerships

Partnerships are a popular business structure that allows more than one person to share ownership and profits in a company. In addition, they allow partners to work together and combine their skills and resources to create a strong business entity. Partnerships are often easier and less expensive to establish compared to other business structures. However, it’s important to note that a poorly-planned partnership can lead to mismanagement and disagreements that can negatively impact the business. Business partners are responsible for the actions of their partnership, including any debts incurred. They also share in the company’s profits and are liable for its losses. They can be compensated with either a percentage of the company’s profits or an agreed-upon salary. Depending on the type of partnership, there may be limits on liability.

Types of Partnerships

There are several types of partnership structures, each with its benefits and drawbacks. For example, limited liability partnerships (LLPs) allow investors to buy into a business with little or no personal risk and maintain limited involvement in decision-making. However, a limited partner is still liable for the debts of the business to an extent equal to the amount contributed by the investor and may be forced to contribute more if the business becomes insolvent.

General partnerships (GPs) are comprised of two or more people who manage and have unlimited liability for the business. This type of partnership doesn’t require any formalities and can even exist informally if two or more persons are carrying on a joint enterprise for profit. A written agreement isn’t required, but it is recommended to establish procedures for making major business decisions, sharing profits and losses, and what happens if one partner wants to leave or dies.

What to Consider Before Starting a Partnership?

Partnerships can offer a lot of benefits for businesses, but not everyone is willing to put their personal assets at risk by being liable for the business. For some, the risks are simply too high — even with adequate insurance coverage. If you’re not comfortable with this level of risk, you might want to consider other business structures. If you’re considering a partnership, it’s also important to think about your long-term plans for the company. For example, do you want to expand the business beyond the current partners’ expertise? A partner with complementary skills can help you achieve that goal. Moreover, a partner can provide additional funding sources to help you grow your business.

Partnerships have several tax advantages over other business structures. The partnership itself doesn’t pay any income taxes, but the profits and losses “pass through” to each partner and are incorporated into their individual federal income tax returns. This eliminates double taxation, which is a common problem with corporations and many LLCs. Additionally, partnerships can establish an internal plan to facilitate contributions from partners to nonconnected political committees without establishing a PAC or triggering reporting obligations. The Commission has issued advisory opinions (AOs) clarifying that incidental expenses incurred to administer these plans and maintain records of contributions do not count toward contribution limits or cause the partnership to become a political action committee under the Act.

If you decide to dissolve the partnership, it’s important to have a legal agreement in place. This will help you avoid disputes over ownership, rights, and duties. It will also help you determine how to value and compensate a departing partner and transfer their share of the business. In addition to a partnership, you may want to consider other business structures, such as a Limited Liability Company or C-corporation. Each structure has unique tax and liability implications that you should review carefully. For more information, contact a certified public accountant or tax professional.