Business structure is one of the most important aspects of starting and operating a company. The business structure determines various legal issues and operational issues that affect the business, such as tax liability and how profits are used. A partnership is a business structure where ownership is shared among two or more individuals. Partnerships offer several potential advantages and disadvantages over other types of business structures.
In a partnership, income earned by the business goes directly to the partners as income. According to the U.S. Small Business Administration (SBA), income is applied to the personal tax returns of partners. This can potentially reduce taxes owed. Sole proprietorships share this advantage in common with partnerships, although in sole proprietorships, all income goes directly to a single owner, rather than being split between the partners.
Decision making in partnerships is more complicated than in sole proprietorships. Sole owners have total control over the course of the business. In partnerships, decision making responsibility is shared, and there's potential for disagreements that can potentially bog the business down. However, there's also the potential for partners to pool ideas, and vet decisions more thoroughly, before moving forward. Partnerships are able to draw upon the skills of each member, rather than relying on the skills of a single owner.
One of the main drawbacks of a partnership is that the owners are personally liable for the debts of the business. Furthermore, according to the SBA, "partners are jointly and individually liable for the actions of the other partners." This means if one of your partners makes a poor decision that puts the business in debt, you might have to pay for it out of your own pocket, if the business fails.
Partners must draft a partnership agreement to addresses various issues that may affect the business. According to the SBA, a partnership agreement is 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." If a partner happens to die, it can potentially cause a partnership to end.
- SBA: Forms of Ownership
- Internal Revenue Service (IRS). "Partnerships." Accessed May 29, 2020.
- Uniform Law Commission. "The Uniform Limited Partnership Act (ULPA) (2001) (Last Amended 2013): A Summary." Accessed May 29, 2020.
- Internal Revenue Service (IRS). "Limited Liability Company (LLC)." Accessed May 29, 2020.
- Internal Revenue Service (IRS). "LLC Filing as a Corporation or Partnership." Accessed May 29, 2020.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.