What are the Advantages and Disadvantages of a Partnership? | Wednesday January 28th, 2004 | |
What are the advantages and disadvantages of a partnership? How can I finance a partnership? What are the differences in general and limited partnerships?
A partnership is just that-an agreement between two or more people to finance and operate a business. Because more than one person is involved in the venture, it may be easier for you to secure financing than if you were a sole proprietor. You may also discover that a limited partnerships-in which one or more partners invest but do not actively participate in the business-are a good way to fund a business venture.
You can establish a general partnership if your will own or operate your business for profit with more than one person. Partnerships, unlike sole proprietorships, are legally entities separate from the partners themselves. Two kinds of partnerships are available: general partnerships and limited partnerships.
You may form a general partnership by an oral or written partnership agreement; you should be sure that your agreement is in writing to prevent future problems. Generally, each partner makes a substantial contribution to the business in the form of cash, property or services. These investments are made in exchange for an “interest” (a legal term for some kind of ownership) in the partnership.
In a general partnership, each general partner has equal responsibility and authority to run the business. Each partner should be involved in day-to-day operations of the business, and should make management decisions. Any partner may represent the business without the knowledge of the other partners-the actions of one partner can bind the entire partnership. If one partner signs a contract on behalf of the partnership, the general partnership and each partner are responsible for that contract.
According to the law, partners are to treat each other fairly and with the highest degree of loyalty. This is known as a fiduciary duty. As a partner, you cannot perform actions related to your business that would harm your partner or only benefit you individually. A partner, for example, cannot open a business which competes with the partnership business. This is known as a “conflict of interest,” and is not legal.
Partners are treated as owners of their partnership, much as sole proprietors are treated as the owners of their proprietorship. General partners do not generally pay themselves salaries, but instead share in the profits and losses of the partnership. When filing taxes, partners report their share of profits and losses and their personal tax return, regardless of whether or not the profits are distributed to partners or kept in the business. While general partnerships do not have to pay state or federal income taxes, they must file an annual informational tax return with the Internal Revenue Service and State Franchise Tax Board. This return indicates how much the partnership earned or lost and how much each partner earned or lost. The general partnership must also file annual tax forms for each partner indicating the income each partner has earned, if any. Each partner also adds their earnings (or subtracts their losses) from their personal tax returns.
Much like sole proprietorships, partnerships are relatively inexpensive to 'get going.' Because of their relative ease of formation, businesspersons may decide to enter into a partnership before fully examining its financial advantages and disadvantages. You should carefully inventory all the expenses you will have for your business-payroll, insurance, supplies, etc.-to determine how much money you and your partner(s) will actually need to get your business off the ground.
You and your partner(s) will be the only owners and only direct beneficiaries of the business, so it is not likely that you will attract outside investors. It will be necessary to discuss financing options for your business with a lender at a bank. It is more than likely that you and your partner(s) will be almost completely personally responsible for covering the costs of starting your business. You may each have enough money to invest to start the business, or you may need to secure business loans from a lender.
In addition to general partnerships, discussed above, limited partnerships may be a viable option for your business structure. Because of the structure of a limited partnership, it will be easier to attract limited partners, who act as investors in your business.
Limited partnerships are much like general partnerships, but include two types of partners: general partners and limited partners. Limited partnerships are generally formed to encourage the limited partners to invest in the business without exposing them to personal liability for the actions of general partners.
In a limited partnership, as in a general partnership, the general partners are responsible for managing the business and are personally liable for all business debts. Limited partners, however, are responsible for contributing money to the business, but are not responsible for running the business. They are usually not personally liable for the debts of partnership beyond what they contributed to the business. This is why it is said that limited partners have limited liability. If you and your partner do not believe yourself to be financially stable enough to start your own business, you may want to consider a limited partnership. As with starting any other type of business, you will want to discuss your options with a banker or lender.
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