Partnerships
Posted on 19. Dec, 2008 by Terry in Income Taxes
In a Partnership, two or more people share ownership of a single business. Like proprietor-ships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps Will be taken to dissolve the partnership when needed.
It’s hard to think about a breakup when the business is just getting started, but many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They must decide up front how much time and capital each will contribute, etc.
Advantages of a Partnership
Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners’ personal tax returns.
Prospective employees may be attracted to the business if given the incentive to become a partner.
The business usually will benefit from partners who have complementary skills.
Disadvantages of a Partnership
Partners are jointly and individually liable for the actions of the other partners.
Profits must be shared with others.
Since decisions are shared, disagreements can occur.
Some employee benefits are not deductible from business income on tax returns.
The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
Types of Partnerships that should be considered
General Partnership – Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states otherwise.
Limited Partnership and Partnership with limited liability – Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.
Joint Venture – Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such as well as distribute accumulated partnership assets upon dissolution of the entity.
That’s it for Partnerships. My next post will take up Corporations. I’ll deal with regular corporations, Subchapter S Corporations, and Limited Liability Companies (LLC).
I’m closing down next week for the Christmas Holiday and will not post again until after Christmas. I hope all of you have a Happy Holiday Season.
