Partnerships

Introduction

In a Partnership, two or more people share ownership of a single business. Like proprietorship, 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. Yes, 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 also 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:

1.        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 differently.

2.        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.

3.        Joint Venture
Acts like a general partnership, but are 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.