Ease of formation
Shared business and tax responsibility
Certain tax benefits
Personal liability for partner actions
More complicated taxes
A partnership is when two or more parties formally agree to do business together. The terms of the partnership are usually laid out in a legal document, but two people can start doing business together with just a handshake. Partners typically share in profits, liabilities, and business responsibilities.
Partnerships are incredibly easy to form because you don’t have to file them with the state. In a way, a partnership is a lot like a sole proprietorship if it were run by multiple people.
The main benefit of having another person running your company is not having to go it alone. Businesses can be a nightmare to manage and often get bigger and more complicated over time, so having another entrepreneur on hand to keep things running smoothly can be a godsend.
Partnerships also allow you to bring new networks and expertise into your business mix. For example, you could find someone skilled in building and managing profitable sales teams. Understanding your weaknesses as an entrepreneur will help you find someone who can fill in your gaps.
Lastly, partnerships don’t pay business income tax. The taxes and liabilities pass through the business, and the partners pay sole-proprietorship taxes based on their share of the income.
Sharing liability is a bit of a double-edged sword because, on the one hand, it means you don’t have to shoulder the burden all by yourself, but on the other, you are personally responsible for the actions of your partner.
Because partners also share in all the profits according to their ownership percentage in the company, you can’t unilaterally make decisions about reinvesting profits—each partner will get to decide how to invest their profits.
So, if your partner’s bad business decisions lead to a lawsuit, and that partner has spent all their profits, you may have to pay any fees assessed.
This brings us to one of the main problems with partnerships: relationship pains. It may sound like a fun idea to go into business with your best friend, but what happens if that friend starts wasting company money and becomes lazy in shouldering their work? You’ll have to deal with that, and trust us, it’s a real pain.
Businesses are hard enough to build and maintain without a partner sabotaging them from the inside, so you should find a seasoned partner who you can see yourself running a successful business with in 10 years.
Also, while there are some tax benefits in being a partnership as compared to a corporation, partnership tax filing is a bit more complicated than sole proprietor taxes because there are a few extra forms that must be filled out detailing the income of the partnership.
There are a few different kinds of partnership agreements common in the small-business space.
A general partnership is a simple partnership between two or more people who agree to share profits and tax responsibility. Usually each partner has unlimited liability.
Unlimited liability means having full responsibility for any liabilities placed on the business. In a partnership, for example, it’s legal for a judge to hold you personally responsible for paying a business fine charged as a result of your partner’s actions.
Your businesses must have both general and limited partners to be legally considered part of a limited partnership. Your general partners are the ones who share in unlimited liability. Limited partners may take the form of equity investors who solely share your profits and business equity in exchange for financing assets. You spell out the liability of limited partners in the partnership agreement.
Joint ventures are weird because not all joint ventures are partnerships but all partnerships are a type of joint venture. What makes a joint venture different from a partnership is its flexibility. Anything you can write into a contract between you and any other entity can be considered a joint venture.
Even large corporations can enter into joint ventures with other groups or individuals. A business, for example, could set up a joint venture with a manufacturer to pay much less for manufactured goods in exchange for a cut of sales profits.
Joint ventures are a great way to do business with others without having to enter into a full partnership agreement.