A partnership is a business that has more than one owner that has not filed papers for becoming a corporation or Limited Liability Company (LLC). Partnerships have two basic types, a general partnership and a limited partnership. A general partnership is the simplest and less costly co-owned business structure to create and maintain. In a general partnership, every partner has a hand in managing the business.
Important Facts Regarding Business Partnership
Personal Liability for all Owners
As co-owner of the business, all partners are liable for all business obligations and debts. This includes court judgment in the case the business cannot pay a creditor like a supplier, lender, or landlord. The creditor can legally go after the partners’ possessions like their houses, cars and bank accounts. This personal liability has few exceptions. If the partnership is deemed limited, some of the partners will have less personal liability. A limited partnership has a general partner who has personal liability and who is the one running the business, and the passive investors who are limited partners. Entrepreneurs who are concerned about personal liability should choose to incorporate or operate as a limited liability company (LLC) instead of a partnership.
As partners in a business, any contract or business conducted by any individual partner usually binds the whole business and all partners to that contract. If the terms of the contract are onerous or unfavorable, as a partner, you will personally be held accountable for the contractual obligations. There are only a few limitations to a partner’s ability to make a commitment to a deal – for example, a partner acting alone cannot bind the partnership to a sale of all the assets of the partnership. But generally, all transactions done by any individual partner will bind all the other partners to the deal.
Any business debt has binding effects on all partners, and each individual partner can be sued or required to pay in full the amount of the business debt. With this kind of personal liability for authority and partnership debt, it is very important that trust is the foundation for starting a business with a partner.
A partnership does not pay any income tax on the profit because the business income “passes through” the business to the partners who report their profit and losses on their individual income tax returns.
Creating a Partnership
Agreeing to go on a business with another person is the first step in setting up a partnership. Paper work is not involved at this stage.
Like most new businesses, you and your partner should meet the requirements of your local registration, mostly by paying a minimum tax. Obtain an employer identification number from the IRS, secure a sellers license from your state and from the local planning board, a zoning permit. An assumed or fictitious name should also be registered.
Partnership has also some disadvantages, one of which is when a partner decides to leave the company, the partnership generally dissolves. The remaining partner will be saddled with the responsibility for all remaining business obligations until the remaining assets and profits are divided among themselves. Partners can create a buy-sell agreement or buy-out agreement as part of the partnership agreement. This will help partners decide if business should persist and then make the transition, if one partner leaves, retires or decides to pursue other interests.
Source: 1-2-Law: http://www.12law.com