Business Growth: Establishing a Partnership Entity

This continues establishing the right legal entity for your business. I am not a lawyer. I encourage you to consult an attorney to establish the best legal entity.

The IRS says “A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

The IRS says “A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.”

The IRS offers great charts to “help you determine some of the forms you may be required to file”.

Advantages of a Partnership

How-to-Start-a-Business.com and Inc. Magazine describe advantages of working in a partnership:

• Partnerships are relatively easy to establish
• Ability to raise money may increase if both partners can contribute more funds
• May attract better prospective employees with the offer of a partnership
• Two people may complement skills and attributes that enhance business success
• Increases cost-effectiveness as each partner focuses on areas of expertise
• Provides moral support and creative brainstorming
• Pass through taxes that apply to partners not the corporation make filing easier

Disadvantages of a Partnership

Partnerships also create possible disadvantages:

• Dissolving a partnership, especially if your partner is a close friend, can be messy
• All partners carry the risk and liability of one another
• Partners share the profits according to the written (if they are smart) agreement
• Shared decision making also creates shared disagreements
• Partnerships can dissolve upon death, disagreement, one partner not carrying a load

Many people experience satisfying business partnerships. Many encounter problems,  dissolved friendships and lawsuits. Consult an attorney to draw up a general or limited liability partnership. Include sections on liability, protections, disagreement, dissolution, and division of assets.

Come back Tuesday to explore how a C-Corp may help your business—if you qualify