Partnership
A partnership is a single business where two or more people share ownership.
When two or more people decide to join together to carry on a trade or business, their relationship is considered to be a partnership. In general, each partner contributes to all aspects of the business including money, property, and labor or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision making processes, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners), even how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.
Types of Partnerships
There are three general types of partnership arrangements:
- General Partnerships assume that profits, liability, and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
- Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are seen as attractive to investors of short-term projects.
- Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.
Forming a Partnership
To form a partnership you must register your business with the state. This process is generally done through your Secretary of State’s office. The Business Entity Registration page has information on specific filing requirements in the state where your business will be formed.
You’ll also need to establish your business name. For partnerships, your legal name is the name given in your partnership agreement or the last names of the partners. If you choose to operate under a name different than the officially registered name, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for "doing business as").
Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use the Licensing & Permits tool on sbcacommunity.com to find a listing of federal, state and local permits, licenses, and registrations you’ll need to run a business.
If you are hiring employees, read more about federal and state regulations for employers.
Partnership Taxes
Most businesses will need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit.
A partnership must file an annual information return to report the income, deductions, gains, and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business "passes through" any profits or losses to its partners. Each partner includes their share of the partnership’s income or loss on his or her personal tax return.
The IRS guide to Partnerships provides all relevant tax forms and additional information regarding their use.
Partnership taxes generally include:
- Annual Return of Income
- Employment Taxes
- Excise Taxes
Partners in the partnership are responsible for several additional taxes, including:
- Income Tax
- Self-Employment Tax
- Estimated Tax
Filing information for partnerships:
- Partnerships must furnish copies of their Schedule K-1 (Form 2020) to all partners by the date Form 2020 is required to be filed, including extensions.
- Partners are not employees and should not be issued a Form W-2.
The IRS guide to Partnerships provides all relevant tax forms and additional information regarding their purpose and use.
Advantages of a Partnership
Easy and Inexpensive. Partnerships are generally an inexpensive and easily-formed business structure. The majority of time spent starting a partnership is often spent developing the partnership agreement.
Shared Financial Commitment. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling your seed money.
Complementary Skills. A good partnership should reap the benefits of being able to utilize the strengths, resources, and expertise of each partner.
Partnership Incentives for Employees. Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and highly qualified employees.
Disadvantages of a Partnership
Joint and Individual Liability. Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, they are also liable for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the parternship’s debt.
Disagreements Among Partners. With too many cooks in the kitchen, there are bound to be disagreements among at one point or another. Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible.
Shared Profits. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. If there isn’t an equal contribution of time, effort, or resources, this can cause discord among partners.
