What Is A Partnership Business?
There are many trading structures to choose from when you set up a new company. You might qualify as a partnership, a corporation, or a sole proprietor. And knowing what kind of trading structure to use is just as important as knowing if you should work with a startup advisor or a consultant. Both of these areas will contribute to your future success or failure.
In this article, we’ll discuss what it is to have a partnership business. In short, it’s when two or more partners join, with a partnership agreement, to operate a business together.
Depending on the type of partnership, liability, and personal risk can vary. The trading style you choose will influence everything from your taxes and investments to everyday operations. So, let’s delve into the different types and their pros and cons, so you can examine all your options before deciding.
The Two Types Of Partnership Business
Partnerships are the most straightforward option if you’re launching a new venture with someone. There are two main types:
Limited partnerships (LP)
Limited liability partnerships (LLP)
Now, that extra ‘L’ makes a big difference!
Limited Partnerships
Limited partnerships have one general partner with unlimited liability and primary control over business operations.
Unlimited liability means that the individual has no protection from business debts.
The other partners, called limited partners, have limited risk but don’t have as much say in big decisions.
Limited Liability Partnerships
LLPs are similar to LPs, but every owner has limited liability.
LLPs require no less than two general partners, and all of these partners share in losses and profits. They can all take part in company decisions and contribute funds and assets.
Each partner’s liability only goes as far as what they’ve invested into the company.
Benefits Of Trading As A Partnership
One common reason why many new startup choose to launch as a partnership is that it’s uncomplicated:
There are no incorporation costs
Partners declare their profit share as self-employed individuals
You can amend the partnership agreement as required
It’s easy to raise capital by inviting new partners in
The administration is straightforward
Partners are shielded from liabilities if trading as an LLP
While there isn’t a federal statute defining a partnership business, the partners must file tax returns, usually via Schedule K.
However, each partner isn’t double-taxed, as the partnership company itself won’t need to pay business taxes.
Is A Partnership Structure Right For My Business?
When deciding how to get your venture up and running, it’s necessary to evaluate all your available options.
While it’s not a common type of partnership structure, you should have a cooperative business explained to you before deciding. A cooperative company structure is ideal if you’re launching a people-centered enterprise that aims to benefit the participating individuals.
Liability is a critical parameter to take into account because although an LP is more straightforward, unlimited liability means that general partners are fully exposed to all business debt.
On the other hand, LLPs and cooperatives offer more appealing liability clauses.
Roles Within A Partnership Business
Partnerships are common in law, architecture, and accountancy. These sectors usually use LLPs because they protect partners to a certain extent.
If one partner were sued for malpractice within a partnership business, the other partners wouldn’t be at risk.
You can introduce a range of positions in partnerships:
Equity partners - contribute capital to the business and have shared control over critical decisions.
Salaried partners - are less senior and don’t have an ownership stake.
Associates - aren’t part of the management structure or ownership and work on behalf of the partnership.
Silent partners - don’t get involved with day-to-day operations and have liability limited to their invested amount.
Silent partners might be suitable if you have an external investor who doesn’t intend to trade or operate through the business but is investing in return for a portion of company ownership and dividends.
Creating A Partnership Agreement
Perhaps the most crucial part of establishing a partnership is ensuring you have a watertight formal agreement in place.
The formal agreement should state:
The trading name of the business
Contributions made, and ownership percentages
How profits and losses will be distributed
The authority level of each partner
What happens if a partner leaves
Duties and responsibilities
An acceptance of personal liabilities
Processes for dispute resolutions
Every partner needs to provide a witnessed signature to the agreement, confirming the objective of the business and their role within it.
How Is A Partnership Different From Another Business Structure?
Partnerships involve two or more people carrying on a business and have similar personal liability and tax rules.
Like LLPs, owners aren’t personally liable for business debt within LLCs. Their risk is restricted to their company share.
If you’re considering incorporating, the core differences to factor in are that:
C-Corp and B-Corp corporations pay corporate tax, not self-employment tax or personal tax, but the business is a separate legal entity for debt exposure.
Multiple individuals can own an S-Corp company, but all must be US citizens, and there can’t be over 100 shareholders. Each pays personal tax against their profit share.
A nonprofit corporation may also be a good option for you, depending on the nature of the business and the overarching aims. Most nonprofits are tax-exempt, but they cannot share any corporate gains between owners, officers, or directors.
Final Thoughts
As we’ve seen, there is a lot to take in when you’re deciding whether a partnership structure is optimal for your company.
Take your time to analyze the pros and cons, and ensure you have a solid agreement in place with defined liabilities and rewards.
If any disagreements arise, you’ll need a legally recognized document to fall back on. It massively helps if every partner is on the same page, with clear expectations.