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A partnership is legally defined as any business owned by two or more people that is not registered as a corporation or limited liability company, or LLC. There are two types of partnerships, general and limited. If two or more people wish to start a business, it is essential that they research their options and choose the path best suiting their needs.
Limited Partnerships, or LP, consist of general partners and limited partners. The general partners are completely responsible for liabilities and other business commitments. Unless limited partners help in managing the business, they cannot be held legally accountable for any business transaction or debt. Limited Partnerships will often name corporations as the general partner. Corporations typically have shareholders within their business, greatly reducing their liability. Even if the general partner is not a corporation, the chance of being held liable for a business deal is reduced by adding shareholders. If a judgment is obtained against a general partner, the debt is payed by that partner’s disbursements to shareholders. This can reduce the stress of general partners participating in a limited partnership. In general partnerships, every owner has control over the business. This also means that partners can be held personally liable for business debts and obligations. If a partnership cannot pay a debt, the creditor can obtain a judgment against any partner. If a partner signs a contract that the business cannot honor, the creditor can take action to seize that partner’s personal assets, such as their land, home, or car. The risks of basic partnerships in regard to liability often propel partners to become limited partners, or evolve their business into a limited liability company. A benefit of forming a general partnership is the joint authority held by all partners. Any owner of a general partnership can sign documents or contracts for the business. The only contracts that may not be signed by one partner are those that involve the assets of every partner. A partner may, however, obligate others to a deal if the other party does not know of any limitations prohibiting them from doing so. With joint authority also comes joint liability. This means that if a partner has a judgment taken against them personally, they may choose to take a judgment against the other partners to help pay the debt. If partners do not completely trust everyone involved with the business, this action can ruin the partnership and end in its’ failure. It is always important to know an individual well before becoming business partners with them to eliminate the worry of personal lawsuits involving business liabilities. Partnerships are not required to file taxes with the IRS; however, they are required to file a Form 1065. This is simply a document stating the income and losses for each partner so that the IRS is certain that all partners are filing their profits correctly. Since the partnership does not file a return, the partners must file business expenses and profits with their individual tax returns. It is important to be exact with personal information since the IRS will receive a copy of the partnership’s income. The consequences of filing false information can include penalties, civil and criminal charges, and eventually imprisonment for up to five years. Partnerships, general and limited alike, do not have to register with the state as a corporation or limited liability company. They do have to register locally to become a recognized business, and often must obtain zoning permits depending on their local government. If the partnership has any employees, they are also required to register with the IRS for an employer identification number. Local governments may also request that all businesses pay a minimum local tax and obtain a license to conduct business within the state. Along with local taxes, business are required to pay quarterly taxes with the IRS. Contacting a tax professional or other qualified individual can help in determining which forms must be filed with the government, and the information required to complete those forms. Registering a partnership is similar to registering a sole proprietorship. Proprietorships must register the name of their business if it does not contain the owner’s name. If a partnership’s name does not contain at least the last name of every partner, the fictitious name must be registered within the county of business. Although partnerships do not legally have to draft Articles of Organization or any other types of agreements, drawing up a partnership agreement can eliminate any questions that may arise in the future regarding what actions are allowed within the partnership. If no agreement is drafted, the partnership will fall under standard rules and regulations. The partnership agreement can contain any type of provision that may ultimately benefit the business. Many agreements include a buy-sell clause that allows members to buy a partner’s interest in the business if they ever decide to retire, or otherwise leave the partnership. Without this clause, a partnership will most likely be completely dissolved if one partner dies or for any reason chooses to leave. If this happens, the partnership is dissolved and the remaining partners must honor any contracts or debts, then divide the assets of the business among themselves. Agreements may also contain a clause stating that one partner has a higher interest in the business than the other partners. Without specifying different percentages in interest, every partner is considered to have an equal share in the partnership. Many small businesses do not worry with this specification since the partners are equally involved.
Starting a partnership is the simplest way to form a business with more than one owner. Since many registrations are not required for partnerships, the process is quite beneficial for anyone wishing to slowly build a successful trade. Many small businesses evolve after time and become limited liability companies and corporations. This makes it even more vital to completely trust everyone involved in the partnership. If partners can work together to create and maintain their partnership, they can ultimately ensure that their business’ future is successful.
If you are an entrepreneur thinking of running a small business from your home office, then The Tax Club can prove to be an extremely powerful resource for your endeavor.
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