Understanding Business Partnerships

Business partnerships offer business owners one way to structure a business when there is more than one owner involved. Those who do not want to take the time or spend the money to register as a corporation or LLC can run their business as a partnership.

There are two basic types of partnerships your business can consider: general and limited partnerships. General is the most common structure, as this gives all partners a hand in the day-to-day management of the business. This is a simple and inexpensive way to structure your business.

Like all business structures, business partnerships have both benefits and drawbacks. Understanding these will help you and your business partners decide if this is the right structure for your needs.

Liability

In a partnership, all owners are held liable for all business debts and obligations. This is a personal liability. Should someone sue your business, they would also be suing you and the other owners. Your house, car, or other assets could easily be taken by creditors because of business expenses. The exception is if you limit personal responsibility to some partners through a limited partnership.

This partnership is joint, which means either partner could be the one sued or held liable. In the instance where just one partner is held liable, the partner who is sued would have to sue the other partner in order to have a shared liability.

Taxes

Partnerships do not separate taxes from their owners. The partnership does not pay taxes. The taxes are passed on to the owners. Their share of the profits or losses based on their share in the business is reported on their individual tax returns, and the partners may be responsible for the quarterly estimated tax payments. The business must file IRS Form 1065 to show the share each partner is responsible to pay.

Authority

The business contract outlining the details of the partnership will also outline the details of who is responsible to pay what in the partnership. That said, your partner may be able to commit you to a deal that you are held personally liable for. Make sure that the authority is carefully outlined in your business agreements, and that you trust your partner to uphold his end of the deal.

Getting Started

You do not need to file any specific paperwork to set up a partnership. All you need to do is agree to start the business with the other individuals. You may need to file local registration with your city, county, or state, depending on the type of service or product you are going to offer. You will need an Employer Identification Number if your type of business requires it. You must register your business name if you do not intend to use your own names. Otherwise, you do not have other legal requirements to meet in order to start business as a partnership.