Things to Know About Business Partnerships

Starting a small business is exciting, but new ventures can overwhelm one lone entrepreneur. A good partner might help. Business partnerships are a simple organizational structure that offers many advantages but also has unique risks.

Forming Business Partnerships

Business partnerships are easy to create. In most states, the law only requires a verbal agreement between the owners, but formal documentation is always preferable. With the help of an attorney, owners draft a set of agreements defining the rights and responsibilities of partners as well as critical managerial strategies. The owners select a name for their company, and most businesses also obtain an Employer Identification Number (EIN) from the IRS. The EIN allows the firm to open accounts, and it distinguishes company assets from personal property.

There are two types of partnerships. In general partnerships, two or more owners share equal rights and responsibilities. Owners also split profits and debts. A limited partnership is a bit more complicated. This type of arrangement usually features one primary owner who controls the interests of the firm. Other owners are given smaller stakes in the company often as a reward or form of compensation.

Advantages

Even a simple venture requires significant investments of time, money, and emotion to succeed. Partners divide the workload and distribute the risks. Partners also typically increase the pool of initial resources. Shared investments overcome barriers to entering markets which increases the odds of success. Tax independence is one of the key business partnership benefits. Each co-owner of the company files separate taxes and declares a portion profits as personal income. The company itself does not need to submit tax forms to the IRS. This structure is straightforward, and sometimes splitting profits lowers marginal income tax rates enough to save money.

Things to Think About

Even though there are many business partnership benefits, there are some dangers as well. Each party is responsible for the conduct of the other partners. One of the partners might incur debts or violate laws and regulations. The consequence of a bad decision damages all owners of the company. Partnerships are also difficult to break. When one owner decides to leave the business, it may be impossible to sell an interest in the firm without permission from the other owners.

A partnership may work well under the right circumstances, but entrepreneurs should always research their options before deciding on a business structure of any kind. If you need legal assistance you can also find additional legal aid here and you can search for a lawyer here.