A partnership exists when there is more than one owner of a business, and that business is not incorporated or organized as a limited liability company. The partners share in the profits, losses, and liabilities. The partners could be individuals, corporations, trusts, other partnerships, or any combination of these examples. One of the biggest disadvantages is that the owners have unlimited liability for all legal debts and obligations of the company. Additionally, each of the partners acts as a representative, and as such, can commit the company to obligations without approval of the other partners. Liability caused by one partner leaves both partners vulnerable to lawsuits. The tax advantages aren’t as significant as they are with a corporation. Business income and losses are reported on the individual tax returns of the owners.
A Partnership is often utilized when two or more owners want to participate in the daily operation of the business. The partnership begins as soon as business activity is started with another person, with or without any paperwork being completed. Even though the law does not require it, most partners draw up a written partnership agreement to outline how they will manage the business. This agreement should also state how profits and losses are to be distributed. If a written agreement is not created, then the partnership laws of one’s state will govern the partnership. Making the agreement will allow the partners an opportunity to clearly spell out the expectations that they have of each other.
Benefits of a Partnership
A partnership allows business profits and losses to be reported on the individual tax returns of each owner. The individual strengths of each partner can best be put to work in the managerial and financial arenas. Partnerships are relatively easy to establish. The moment two or more parties begin doing business, the partnership begins. There is a minimum of paperwork and legal necessities required to start a partnership. Most states encourage a partnership agreement to be drafted, and the required business licenses and certificates to be obtained.
- Flow through taxation
- Relatively easy to establish
- Talents and strengths of each partner can best be utilized
- Minimal paperwork and legal restrictions
Downside to Partnerships
Unlike a corporation or limited liability company, the owners of a partnership have unlimited liability. This means that if the business is sued, creditors can go after any available personal property and assets to satisfy the debts. There is also the issue that each owner acts as an agent of the company. As an agent of the company, each partner can bring about liability. If an accident occurs with one partner during the course of conducting business, all partners are equally liable. This means that when the business is sued, regardless of which of the partners created the liability, both or all partners can lose their home, automobiles, savings and other assets. Agents of the company also have the ability to enter into legal agreements and obligations without first getting approval from the other partners. In the case where a prior written agreement hasn’t been made, the partnership would cease to exist.
- Partners have unlimited liability with regard to the liabilities and debts of the business
- One partner can cause all partners to suffer the loss of business and personal assets
- Without advance planning, the company terminated upon the death of a partner
- A decision by one partner with or without prior approval from the other partners can obligate the business.
- Limited ability to raise capital
- Divided authority
- 85% of business partnerships break up within the first year
The partnership is most like the sole proprietorship model of business. A partnership is essentially a sole proprietorship with more than one owner. Both have flow through taxation, as well as limited regulation and scrutiny. They are both fairly easy to begin, and end. The sole proprietorship and partnership also share the dubious distinction of allowing for unlimited liability for debts and obligations of the company. Both business types have a limited duration. They both share in the difficulties found in trying to raise capital. Great caution should be used because a lawsuit against a partnership can result in the seizure of current and future assets. Corporations and limited liability companies, on the other hand, have legal provisions to protect owners from business litigation.