A partnership is when two or more persons run a business for profit. “Persons” are defined broadly and can include individuals, other partnerships, corporations or LLCs. Each partner is considered a business owner and contributes money, labor, skills or property in return for an ownership stake in the business.
If you don’t know whether a partnership is right for you, check out our video guides to business entities to assess your options.
Although many don’t like to admit it, disagreements between business partners are common, even if the partner is your spouse, family member, friend or professional colleague. As such, it’s imperative to have a written partnership agreement that specifies, among other important topics, what would happen if partners disagree and, worst-case scenario, how a partner can sell its stake in the business.
A partnership’s benefits and disadvantages should be thoroughly considered before selecting this business structure. See the video below for an overview of partnerships, and continue reading for more in-depth coverage.
Why Should I Choose a Partnership?
- Relatively easy to form: Some states require you to register your partnership, but other than that, there are no paperwork or registration requirements.
- No maintenance: Unlike corporations, partnerships don’t have annual meetings and recordkeeping requirements.
- Preferable tax treatment: Business profits and losses “pass through” to each partner’s individual tax return.
- Shared risk: Since you aren’t the only owner, you don’t bear all the risk.
What Are the Pitfalls of Partnerships?
- Personal liability: Each general partner is jointly and severally liable for the debts and obligations of the business. Personal bank accounts and residences are at risk.
- Disputes and disagreements: As mentioned above, partnership disagreements are much more prevalent than many think. Disagreements, not lack of profits, can cause the demise of a partnership.
- Shared profits: As the old adage goes, the higher the risk, the higher the reward. You may be sharing risk, but you’ll also be sharing profits.