Partnership in Business and Its Types
Partnership implies shared ownership where two people or more share the ownership of a single business. The partners don’t just share the profits and losses of the business but contribute to each and every aspect of the business, whether it is the money, resources, labor or even skills. Since partnership is between two or more people unlike sole proprietorships, it is good to develop a legal partnership agreement as well as discuss a number of issues before getting into one. It is even important for the purpose of decision making since there would be more than one persons involved in the key decisions of the organization. The partnership agreement documents important things regarding the partnership and how the important decisions are going to be made as well as profit distribution and dispute resolution mechanisms. It also mentions how new partners can be brought in or old partners bought out. It documents the conditions for dissolving the partnership. Partnerships agreements are generally not legally required but still it is strongly advisable to use one in order to avoid any legal difficulties. Operating without such a legal partnership agreement can be extremely risky.
In general there can be three types of partnerships:
– General partnerships:
are partnerships in which the profits, liabilities as well as duties are equally divided among the partners. In case someone opts for an unequal distribution, the percentages are laid out clearly in the partnership agreements. The business is not taxed separately but its profits and losses flow to the partners. The partners pay their individual tax returns. The legal and financial liabilities are of both the partners. Moreover, the partnership income is taxed as personal income. (See General Partnership)
– Limited partnerships:
are not as simple as the general partnerships and allow the partners limited liability as well as limited input with the management decisions. These limits depend on the amount of investment made by each partner. Such agreements are good for people who are investing in the short term projects. In case of the limited partnerships, at least one person has to act as a general partner and at least one as a limited partner. The general partner in this case holds the personal liability as well as management authority for the business. The limited partners generally do not have any management related obligations and their risks are only limited to the investments they have made into the business or any other risks listed in the partnership agreement. The partnership obligation of the general partners in case of limited partnerships is quite similar to that of the general partners in case of general partnership. In case the limited partners start participating in management activities they lose the protection that comes with the status of being a limited partner.
– Joint ventures
are general partnerships which are formed for a limited period of time or for a single project. If the partners want their joint venture to be recognized as an on-going partnership they are required to file for it. generally each of the partners contributes to the assets and shares the risks involved in the formation of a joint venture.
One is required to register his business with his state prior to forming a partnership which is done generally through the secretary of state’s office. One should also obtain the necessary licenses and permits once he has registered his business. Businesses, though they are required to register with the IRS do not themselves pay the taxes which are passed on to the individual partners. The partners while filing their personal income tax returns include their own shares of profit or loss from the partnership.
Joint ventures are used widely across the industry by companies to gain entry into foreign markets. Foreign companies form joint ventures with the local companies where they bring new technologies and business practices while the domestic companies already have the necessary permits and relationships to run the venture.
Advantages of partnerships:
– Partnerships are easy as well as inexpensive to form. The only major thing to do before forming one is to develop the partnership agreement.
– Another major advantage is that the partners are equally committed to the success of the business and can pool their resources to obtain capital. So, securing credit is also easier with partnerships as compared to sole proprietorships.
– Partners bring complementary skills, strengths and resources which are beneficial for the business. Moreover, partnerships can be easy methods to venture into new areas where one partner already has the necessary skills and experience and others can bring in investment or other assets.
Disadvantages of Partnerships:
– One is not just responsible for his own decisions but also for the decisions made by his partners. Moreover, the personal assets of all the partners can be used to satisfy the business debts.
There may arise discord due to unequal contributions with regard to efforts and time invested by each of the partners. The legal issues with partnerships can be slightly more complicated than sole proprietorships where one is liable for his own actions and decisions only.