Thursday, July 23, 2009

How To Start A Business: Partnerships

A partnership is a for-profit business association of two or more persons. Partners can include individuals, groups of individuals, companies, and corporations. Partnerships are highly adaptable in form and vary in complexity. Each partner shares directly in the organization's profits and shares control of the business operation. The consequence of this profit sharing is that partners are jointly and independently liable for the partnership's debts.

The business component of a partnership is defined broadly by state laws in accordance to the Uniform Partnership Act. These statutes establish the basic legal rules that apply to partnerships and will control many aspects of your partnership's life unless you set out different rules in a written partnership agreement. Don't be tempted to leave the terms of your partnership up to these state laws because they were designed as one-size-fits-all fallback rules in the absence of a written partnership agreement. If you are going to create a partnership agreement , some of the items that should be included in your agreement are:

  • Name of partnership.
  • Contributions to the partnership.
  • Allocation of profits, losses, and withdraws.
  • Partner's agency authority.
  • Partnership decision making.
  • Management duties.
  • Admitting new partners
  • Withdrawal or death of partners
A partnership must file an annual information return using Form 1065 to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return using Form 1040 and Schedule E. If you do business as a partnership, the the partnership will be liable for paying employment taxes if you hire employees, and certain excise taxes. Some of the forms you will need for employment taxes are Form 940, Form 941 and Form 8109-B.

For more information see Publication 541 or consult your accountant or tax attorney.

Partners are not employees and should not be issued a Form W-2's. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions. As a partner, some of the taxes you will be responsible for paying are self employment taxes and estimated taxes.

The advantages of operating a business as a partnership are:

  • You have a shared financial commitment.
  • You can pool together resources, expertise and strengths.
  • There are limited start up costs.
The disadvantages of operating a business as a partnership are:
  • Partners are personally liable business debts and liabilities.
  • There may be unequal commitment in terms of time and finances.
  • There may be personal disputes with the partners.
  • Partners may have different visions or goals for the business.

1 comment:

Carol Topp, CPA said...

Phil, Nice summary on partnerships. I tell clients, "Partnerships are like being married, but you're not in love!"
I hope you'll follow up with S Corps soon. One of my acquaintances is convinced she saved paying SE tax by forming an S Corp. I claim the S Corp is still paying the SE tax as FICA & Medicare tax. I hope you address that issue.