Partnership

A partnership is just that-an agreement between two or more people to finance and operate a business. Because more than one person is involved in the venture, it may be easier for you to secure financing than if you were a sole proprietor.

Unlike sole proprietorships, partnerships are legally entities separate from the partners themselves. Two kinds of partnerships are available: general partnerships and limited partnerships. General partners are all active in the business.

Advantages of General Partnerships

• You may form a general partnership by an oral or written partnership agreement but should be sure that your agreement is in writing to prevent future problems.

• Generally, each partner makes a substantial contribution to the business in the form of cash, property or services in exchange for specific ownership percentage or share.

• Each general partner has equal responsibility and authority to run the business. Each partner should be involved in day-to-day operations of the business, and should make management decisions.

• According to the law, partners are to treat each other fairly and with the highest degree of loyalty. This is known as a fiduciary duty.

• When filing taxes, partners report their share of profits and losses and their personal tax return, regardless of whether or not the profits are distributed to partners or kept in the business. Each partner also adds their earnings (or subtracts their losses) from their personal tax returns.

• You and your partner(s) will be the only owners and only direct beneficiaries of the business, so it is not likely that you will attract outside investors.

Disadvantages of General Partnerships

• Any partner may represent the business without the knowledge of the other partners and the actions of one partner can bind the entire partnership. If one partner signs a contract on behalf of the partnership, the general partnership and each partner are responsible for that contract.

• As a partner, you cannot perform actions related to your business that would harm your partner or only benefit you individually. his is known as a “conflict of interest,” and is not legal. (For example, open a competing business.)

• While general partnerships do not have to pay state or federal income taxes, they must file an annual informational tax return with the Internal Revenue Service and State Franchise Tax Board. This return indicates how much the partnership earned or lost and how much each partner earned or lost. The general partnership must also file annual tax forms for each partner indicating the income each partner has earned, if any.

• Partnership usually has to be dissolved when a partner leaves or dies.

• Disagreements in management plans, operational procedures and future vision for the business can create serious problems and can result in the dissolution of the partnership.

Limited Partnerships

Limited partners invest in the business and are entitled to receive profits and losses but do not participate in the day-to-day activities of the business. Limited partnerships can be a good way to fund a business venture.

Advantages of Limited Partnerships

• Limited partners are usually not personally liable for the debts of partnership beyond what they contributed to the business.

• Much easier to attract investors as limited partners

• Allows for general partners to use their expertise, make key decisions and manage the business

• Limited partners can leave the business or be replaced without the need for the limited partnership to be dissolved.

Disadvantages of Limited Partnerships

• Filings, formalities and state requirements

• General partners assume personal liability

Final Word

I've briefly described the advantages and disadvantages of LLC status. All of the rules and regulations governing LLCs, as well as recent decisions and current issues presently before the various courts today, would require a discussion of LLCs beyond the scope of this article. The information contained in this article is presented to provide a general understanding of the benefits and cautions in selecting LLC status.

For more detailed information and specific advice for your business contact your local small business development center, your accountant or your attorney