In return, each partner shares in the profits and losses of the business. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership bring in new partners or buy out current partners and how to dissolve the partnership.
Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one. For partnerships, your legal name is the name given in your partnership agreement or the last names of the partners. Once your business is registered, you must obtain business licenses and permits.
At a basic level, while a sole trader retains all the profits of their business, those of a partnership are shared amongst the partners. By default, under the Partnerships Act , profits are shared equally, although that position can be amended by a partnership agreement. Sharing profits equitably can raise difficult questions.
What happens when one partner is seen to be putting in less time and effort into the partnership, but still taking their share of the profits? Historically, if the business made more than a certain level of profit, individuals could incur less tax by withdrawing a combination of salary and dividends under a limited company than they could via partnership drawings. But since changes to the taxation of dividends, this difference is far less marked.
However, a limited company still often presents more tax planning opportunities than a business partnership. The tax-efficiency of different business structures depends on your personal circumstances. You should always consult a tax professional, who can offer advice based on your personal circumstances.
But for any business looking to achieve massive growth, a combination of unlimited liability, lack of funding opportunities and a lack of commercial status in the eyes of the world is hardly the perfect recipe for success. The lack of legal personality becomes important here too. Without it, the business cannot own property, enter into contracts or borrow in its own right, difficulties which will become harder to work around as the business grows.
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Start Log in. Start now x. Advantages of a business partnership The business partnership offers a lot of advantages to those who choose to use it. Disadvantages of a business partnership While there are lots of benefits of a partnership business, this model also carries a number of important disadvantages.
These might relate to: The strategic direction in which the business should go or how to get there How to handle any number of discrete business issues that may arise Different views on how partners should be rewarded when they put different amounts of time, skills and level of investment into the business Ambition. Some may want to dedicate every waking moment to growing and developing the business, while others may want a quieter life Differences might not be evident immediately.
Francis Chengo says:. August 2, at am. Aniqa khan says:. February 11, at pm. Samwel mushi says:. Duty of Good Faith and Fairness: Partners must act honestly and fairly in all activities that affect the business.
Duty of Loyalty: Partners should place the best interests of the partnership above their own interests and avoid any conflicts of interest that could hurt the partnership. Duty of Disclosure: Partners should disclose the potential benefits and risks known to them of a prospective business decision so that the partners can make an informed choice about whether to pursue it.
Partners might have to disclose information about business activities, finances, contracts, etc. Duty of Care: Partners must use reasonable care when managing the partnership. For example, partners should document important business matters in writing and maintain books for financial transactions. These fiduciary duties arise from the moment the partnership starts, and they continue until the partnership is dissolved.
State law might specify additional fiduciary duties, but business owners can add to or modify certain fiduciary duties with a partnership agreement. If a partner breaches a fiduciary duty, the other partners can sue.
A partnership agreement can specify different areas of responsibility and different privileges for each owner. You can distribute voting rights and profit share however you see fit.
Some partnerships specify a few managing partners to take the lead on business matters. This is a model statute that provides standard rules about how a partnership should be governed and the rights and duties of each partner. Under RUPA, all partners have equal voting rights and profit shares, even if one partner contributes more resources or money to the company.
General partners are entitled to compensation for their participation in the partnership. The IRS considers distributions as self-employment income, which is subject to self-employment taxes for Social Security and Medicare. This means each owner reports their share of the partnership's income and losses on their personal tax return and pays the taxes accordingly. The partnership must complete and provide a Schedule K-1 to each owner no later than March 15 each year.
Each partner uses the information in the Schedule K-1 to complete their Form tax return. Income for general partners is usually treated as self-employment income, so the partner should attach Schedule SE to their In addition, the partnership must file Form as an informational return with the IRS no later than April In most states, partners must pay federal, state and local income taxes. There might also be other small-business tax obligations, such as payroll taxes and sales tax collection, depending on the specific circumstances of your company.
Filing business taxes can be a multi-step process, so we recommend using a tax professional to complete your taxes. One partner may not pull his or her own weight. Relationships can sour. Don't discount the emotions in weighing the advantages and the disadvantages of a partnership. But you may be able to prevent emotional problems by carefully choosing who you partner with , looking for someone who shares in your vision, who has values similar to yours, who has the same work ethic and where the chemistry is right.
This can go a long way towards preventing unexpected problems. As circumstances change in the future, you or your partner may wish to sell the business. This could present difficulties if one of the partners isn't interested in selling. You can deal with such an eventuality by including an exit strategy in the partnership agreement.
For example, you may include "a right of first refusal" should your partner decide to sell his or her interest in the business to a third party. This ensures that you retain the right to accept the offer, thus preventing a stranger from joining the business. An exit strategy can address many other issues such as a partner's bankruptcy, disability or desire to move out of the country.
When balancing the advantages and disadvantages of a partnership, you also need to consider if you're able to cope with unpredictability. Even if you have a solid exit strategy in your partnership agreement, the change triggered by a partner's situation can cause instability in the business. Is riding the wave of instability one of your strengths?
In analyzing some of the advantages and disadvantages of a partnership, you may conclude that the advantages outweigh the disadvantages. What's more, some of the disadvantages of a partnership may be overcome with due diligence, proper investigation and a detailed, written, business prenup.
Ultimately, make sure that you're comfortable in a partner role. Ask yourself what growth goals a partnership can help you achieve that you could not do alone. What expertise can you attract in a partner that may be a competitive differentiator? Carefully evaluate all the advantages and disadvantages of a partnership in relation to your financial situation and mindset. Above all, take your time to evaluate your prospective partner to ensure that he or she is a good match.
A business partnership is a marriage. And as with any long-lasting marriage, it's based on finding the right person, someone you trust, and enjoying being together within four walls. Read more articles on team structure. Skip to content. Business Cards.
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