Best Tips on Partnership Business You'll Find Today

best tips on partnership business you'll find today

Written by Chetan Dogra, CPA

Earlier, we learned about the simplest form of business structure – the sole proprietorship in Is Sole Proprietorship Right for You? Find Out in this Guide. Now, let us check out the legal entity where business owner(s) act as a collective in managing the company – a partnership.

Partnership Overview

A general partnership is not a separate legal entity from its owners. In this respect, it is much like a sole proprietorship.

Also, a sole proprietorship has only one owner, whereas a partnership has two or more owners. Now, this is the main distinction between the two types of businesses.

Owners may request withdrawals. If the partnership so directs, they can also request guaranteed payments. Moreover, owners make quarterly tax payments.

Although a written agreement is recommended (and necessary in some places), you can initiate it orally.

At present, many states have laws governing limited liability partnerships (LLPs) that place restrictions on the owners’ responsibility. Also, they deal with issues like profit-loss ratios, business choices, the addition and removal of partners, and operating conditions.

Internal Revenue Service (IRS) monitoring of you and your company may increase as a result of certain partnership allocation models.

Additionally, you must register your business with your state in order to form a partnership. Typically, this is done through the Secretary of State’s office.

Control & Operation in Partnership Business

General Partnership

If a partnership agreement doesn’t state differently, general partners have an equal share of management rights and control.

Generally, control and responsibilities can be specified in a written partnership agreement.

Limited Partnership

The general partners oversee and manage the company’s operations.

Also, liabilities of partners are restricted to their investment

Investment in Partnership Business

Unless otherwise specified in the partnership agreement, all partners have an equal ownership interest in all company assets and liabilities.

Now, ownership percentages can vary according to the number of partners and the written agreement. Notably, the agreement should include details of how a departing partner will be compensated for part ownership upon leaving, passing away, or retiring.

Business Partnership Transferability & Continuity

Unless the agreement allows for the continuance of the business by the remaining partners, the partnership dissolves if a general partner passes away or quits the partnership.

Legal Liability in Partnership Business

No matter which general partner incurs a liability, all general partners are equally responsible for it.

However, limited partners are only accountable for their portion of the investment.

Taxes on Payroll and Compensation

On their portion of self-employment income from the partnership (whether or not disbursed), general partners are subject to self-employment taxes.

But for limited partners, self-employment taxes are not applicable.

Advantages & Disadvantages of Partnership Business

Advantages

Ownership not confined to one individual
One level of net income tax
The distribution of income and expenses may not correlate with ownership percentage

Disadvantages

Personal culpability is uncapped
Each partner is liable in law for the commercial conduct of the other partners.
Different tax returns are necessary

Takeaway in Business Partnerships

If you want to be in the driver’s seat of your business and oversee everything, then Sole Proprietorship is the business model for you. You will be the sole person controlling and owning your business in this legal structure. It is easy to form too.

A partnership is great is you want to share the business responsibilities and liabilities with one or more partner. But if you are looking for maximum protection from personal liability in business, a corporation could be the answer. Watch out for our next blog Corporation that discusses all the various aspects of a corporation.