Setting Up A Partnership Business

If your business is going to be jointly owned and operated by more than one individual, setting up a partnership may be the right legal structure for you to follow. There are mainly 2 kinds of partnership, limited partnership and general partnership.

In a general partnership, all the partners usually hold equal claim to the company and participate jointly in running the business and making business decisions. Of course the role and responsibility of each partner can be different and decided according to the partnership agreement.

In a general partnership all partners are involved in running of the business and share the liability for business debts, activities and claims.

A limited partnership has both general and limited partners. The Gen. partners own and operate the business and assume the liability for the partnership whereas the Limited partners only serve as investors who have no real control over the day-to-day running and business making decisions.

Unless you’re looking for many investors in your business, a limited partnership is generally not the best choice for new business since it requires additional paperwork along with several other administrative complexities. If you have 2 or more partners who are going to be actively involved in running the business and sharing its profits, setting up a general partnership will be a much more easy process to follow.

As with a sole proprietorship, a partnership set up also enjoys its tax benefits. A partnership does not pay tax on the income but passes through any profits or losses to the individual partners. At the time of filing the tax returns, the partnership must file a tax return in the form of form 1065 that reports it income and loss to the Internal Revenue Service. In addition each partner reports his or her share of income and loss on schedule K-1 of form 1065.

One of the obvious disadvantages of a partnership set up is the personal liability. This is a factor that the partnership has in common with the sole proprietorship. General partners are personally liable for the partnerships debts and legal obligations. Each general partner can act on behalf of the partnership, take out loans and make decisions that would affect and be binding on all partners. This of course depends upon the clauses included in the partnership agreement. Sometimes the executive right to enact on certain aspects of the business are withheld from certain partners.

Another feature to note about the partnership is that it is now much more expensive process to establish and more expensive because it requires more extensive legal work and accounting services. Not only is the setting up of a partnership more expensive but also the maintenance and record keeping of the business as well.

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