By the simplest terms, a business partnership involves two, or more, individuals who share the profits and losses of their business; this structure may be either a general partnership, or a limited partnership, as discussed in more detail below.
General Business Partnership versus Limited Business Partnership
In a general partnership, the individuals involved (the partners) all equally share in the management of the business, as well as in the assumption of responsibility for the business’ debts and other liabilities. A limited partnership is comprised of, you guessed it, both general and limited partners, with those limited partners primarily acting only as investors in the business, and not as managers. In deciding between these two forms, it is important to note that limited partnerships are typically more complex in terms of administrative, management, and filing requirements. As such, if you are not anticipating bringing a number of passive investors on board, the limited partnership may not be the best option for your business structure.
What are the Main Advantages of a Business Partnership?
First, partnerships are generally fairly simple, straightforward, and inexpensive to create and operate. Next, general partners have a great deal of latitude in the actions that they can take on behalf of the business. Perhaps one of the most appealing aspects of this structure, though, are the tax implications associated with it. The partnership will not pay income taxes, as the profits and losses of the business “pass-through” to the partners who then generally each file a K-1 IRS form to report his or her portion of the income, deductions, and tax credits of the partnership. The partners also report those partnership profits on their individual tax return form.
What are the Main Disadvantages of a Business Partnership?
There is really only main disadvantage of a partnership – that of the liability imposed on the individual partners. Whether it is a general or limited partnership, all general partners assume personal responsibility for the business’ debts and obligations. Additionally, and not nearly as disadvantageous of this liability, is the fact that it is more costly to create and maintain a limited partnership, as opposed to a general partnership.
How can you Protect Yourself and Your Business?
Although it may feel awkward and difficult, once you have decided to create a partnership, it is crucial that the individual partners discuss the goals, visions, and future that they envision for the partnership, as well as the obligations, responsibilities, and rights that they believe each partner will assume. Then, once these ideas have been fleshed out, the partners should draft and execute a partnership agreement that discusses, among other things, the following:
What is the overall purpose of the partnership?
What will each partner invest in the partnership? And are additional contributions required down the road?
What are each partner’s obligations to, responsibilities and duties for, and rights within the partnership?
May a partner have other, outside, partnership interests? What if the interest is in a competing or similar business?
What happens if a partner wants to leave the partnership? And, may a partner transfer his or her interest to a 3rd party?
Finally, and perhaps most importantly, how will the partners deal with conflicts between the partners themselves, that may stem from their partnership agreement, or that arise from the services/products delivered by the partnership?
While a business partnership is, indeed, among the simplest and most straightforward of the various business structures, it is still prudent for the partners to discuss their goals and visions, and to adequately prepare for their venture. If you are thinking about creating a new business but aren’t sure if the partnership structure is right for you, or if you have decided to create a partnership and would like assistance in drafting your partnership agreement, please give us a call and let us help you gets your new business venture off on the right foot!