This week we are going to review the business structure of a partnership, the third in a series highlighting various business structures and which one is potentially most beneficial to you. Previously I’ve discussed Limited Liability Corporations and Sole Proprietorship. Partnerships are created with another person in the same way you create a sole proprietorship; you simply need two or more people to start business activities. Partnerships are then further defined as either general partnerships or limited partnerships.
General partnerships are ones in which all partners manage the business, share in profits, and assume responsibility for its debts. Like sole proprietorship, partnerships are easy to startup with little or no fees required. Partners pay applicable state and federal income taxes on income as it passes through to their individual tax return and are responsible for self employment taxes. Business expenses and losses are also applied to each partner’s personal tax return. Profits and losses are divided equally among partners unless an operating agreement is in place stating specific percentages for each partner.
Limited partnerships differ first in that they require legal setup and registration. One or more partner acts as the general partner and the others are called limited partners. The general partners are treated the same as in a general partnership but a limited partner is primarily an investor and are not liable for any debts in excess of their contributions. Generally, more people are willing to be an investor in a limited partnership than in a general partnership as to not be liable for the debts of the partnership. Additionally, limited partnerships do not dissolve if a limited partner leaves and at least two partners remain and one is a general partner. An example of a common form of limited partnership is a real estate investment.
According to taxfoundation.org, partnerships are the third most common business entity, with just about 2.2 Million in the United States or about 8% of all businesses. They are easy to join and they are easy to leave. To join as a general partner, an individual must contribute assets and agree to be a partner which includes the liability of expenses and loss. Limited partners typically needs only to contribute assets. To withdraw from a partnership you simply need to give notice, preferably in writing to protect yourself and your business partners.
Partners are legally bound to have a duty of loyalty to the partnership regardless of whether an operating agreement is in place or not. Partners have a duty to keep the partnership going and must not enrich themselves at the expense of the partnership. Each partner is an agent of the partnership and has a duty to provide financial accounting to the other partners.
Remaining in this series is the Corporation and additionally, review of the taxation structure and benefits for each type of business.