If you have been considering forming a partnership, you probably want to know a little bit more about the process along with some advantages of partnership.
There are 2 forms of partnerships: general or limited partnerships.
While a general partnership is easier to form, each partner assumes the same amount of liability when it comes to paying debts or responding to a lawsuit.
However, a limited liability partnership or limited partnership limits the liability that is assumed by the partners.
If you have any questions about the partnership advantages you’ll be getting, email at sam@mollaeilaw.com with your questions.
I can assist you in setting up a partnership or any other business entity.
Let’s get started…
What is a Partnership?
A partnership is a relationship that is created by a contract between two or more people to perform business activities in a co-ownership capacity.
In some partnerships, the partners or co-owners take an active part in the business while other partnerships include partners whose partnership participation is limited. They also have limited liability.
A partnership is different from a corporation as it is not formed as a separate entity from each owner. The income tax is paid by the partnership. However, the losses and profits are separated and distributed among the partners, based on the contract.
A partnership is any collaboration that is assumed by more than one party. These parties may be individuals, non-profits, businesses, governments, or a combination of the aforementioned classifications.
It is a good idea to put an agreement in writing to govern the partnership so that any disagreements may be settled according to the written guidelines. In some instances, a written contract is a legal requirement.
Types of Limited Partnerships
- Limited liability partnerships (LLPs) are regular structures for professional practices, such as architectural, legal, and accounting firms. These arrangements limit each partner’s liability.
- Limited partnerships (LPs) are hybrids of LLPs and general partnerships. In these set-ups, at least one of the partners must assume the role of general partner with full personal liability for any debts acquired by the partnership.
One partner in the LP is a silent partner; therefore, his or her liability is limited to the amount that he or she has invested in the partnership. He or she generally will not participate in the daily operations or management of the partnership.
- Limited liability partnerships (LLPs) are rarely formed. They are a type of limited partnership that offers more protection from liability for the general partners.
If you want to find out more about limited liability partnerships and various advantages of partnership, or LLPs, send me an email at sam@mollaeilaw.com
Advantages of Partnership
The main advantages of partnership in business include ease of set-up and low start-up costs. Because more than one person is involved in the business, you have more capital at your disposal.
Because of the intrinsic advantages of partnership, the parties have more flexibility with arranging to finance, and therefore, a greater borrowing capacity.
When a partnership is formed, you have the opportunity to align yourself with high-caliber people. Plus, an opportunity is created for income splitting – one of the major advantages of partnership in terms of tax savings.
The business affairs are private and external regulations are limited.
If you want to change the legal structure of your business at a later date, it can be implemented fairly easily.
One of the prominent advantages of a partnership is that partnerships can be cost-efficient as each party in a partnership may specialize in certain areas of the business.
Disadvantages of Partnership
You should look at the various partnership advantages and disadvantages before forming one. Now that we know the partnership advantages, let’s take a closer look at the disadvantages.
In a general partnership, the liability is equally assumed; therefore, each partner is jointly and individually liable for the other partners’ actions. Therefore, a major disadvantage of partnership is the fact that it features unlimited liability.
In a general partnership, each partner is liable for all the debts assumed or errors made in the partnership. This is one caveat you must note if you want to form a partnership.
A case in point: If you own one percent of the partnership and the business does not succeed, you are responsible for all the debts of the other partners cannot pay the other 99% of the debts that are a part of the business.
Disagreements may happen from time to time, due to which the partners may end up in unfortunate splits.
A partnership’s life may be limited. If a partner withdraws from the relationship or dies, the partnership will end.
Limitations are placed on a partnership that keeps it from becoming larger.
You need to consult with the other partner or partners in the business. Therefore, you cannot make decisions without their consent.
Partnership Advantages and Disadvantages
One of the key advantages of partnership in business is the fact that capital is more easily sourced and each partner can use his or her special skills to run the business. Disadvantages mainly focus on liability and the payment of self-employment taxes.
Partnership advantages can further be enumerated as follows:
- Sourcing capital – With more partners in the business, capital is easier to source than in a sole proprietorship.
- Specializations – Partners with various skillsets can lend to the business’s performance.
Take note that reporting taxes for a partnership is fairly easy. All you have to do is file a Form 1065, which is a pretty simple filing.
Because the earnings in a partnership go directly to the owners, no double taxation is involved.
The big disadvantage surrounding most general partnerships is the fact that the partners assume unlimited personal liability for a partnership’s debts.
In a general partnership, joint liability and several liabilities can be placed on the business, which means creditors can go after one partner for all the debts of the business.
Self-employment taxes for earnings in a general partnership are high. The tax covers social security and Medicare.
If you need further information along these lines, I can answer your inquiries related to partnership advantages and disadvantages. Send me, Sam Mollaei Esq. Business Lawyer an email at Sam@MollaeiLaw.com
Partnership Advantages and Disadvantages In Terms of a General Partnership
General partnerships offer distinct partnership advantages when it comes to taxation as this business structure is not required to pay an income tax. However, all the partners do assume liability if a company gets sued.
A general partnership also assumes less paperwork. That is because the partnership process requires less in the way of documentation.
A partnership states a business’s purpose and each of the party’s duties. Consult me, Sam Mollaei Esq., a business lawyer at sam@mollaeilaw.com if you need to create this type of agreement and want to make sure you enjoy the advantages of a partnership.
In addition to the issue of legal liability, management issues may develop between partners. If all the partners possess an equal interest in the business, problems can result if guidelines are not established at the outset.
Again, take time and set up a consultation with a qualified attorney if you want to avoid any disputes in your partnership while availing partnership advantages. Send an email to me, Sam Mollaei Esq., a business lawyer at sam@mollaeilaw.com to arrange a meeting.
Advantages of a Partnership over a Sole Proprietorship?
There are partnership advantages over a sole proprietorship as this form of business has more working capital with which to work. In addition, while losses and profits are reported, taxes are not paid on the income that the partnership earns.
Sole proprietorships must pay taxes on all profits of the business. Profits are the total income the sole proprietorship earns minus the business expenses.
Advantages of Partnership over LLC
One of the advantages of a partnership is far easier to set up and start, cost-wise, than an LLC. Formation fees, state fees, and filing fees must all be paid when an LLC is established.
Less paperwork is involved when setting up a partnership than when an LLC is formed. Another advantage of a partnership is that it can be initiated without the need for any formal process.
To maintain the liability protection offered by an LLC, the owners must maintain their records and separate their personal affairs from the LLC. That means the money for the LLC cannot be interspersed with any personal funds.
I can assist you in establishing a partnership or an LLC. Just contact me, Sam Mollaei Esq., a business lawyer at sam@mollaeilaw.com for further details and information.
Advantages of Partnership over Corporation
The main advantages of a partnership over corporations are as follows:
- They cost less to set up
- The formalities are minimal
- They are not liable for unemployment coverage
The cost to set up a corporation includes formation fees, state fees, and filings fees.
While a partnership can forego most formalities when getting established, corporations must follow certain protocols. Formalities include the holding of shareholder meetings, the recordation of corporate minutes, and board of director approvals.
A shareholder of a corporation is required legally to pay unemployment taxes while a partner in a partnership can forego this requirement.
Limited Partnership Advantages
The main advantage of a legal limited liability partnership is that it reduces the liability of each partner in the partnership arrangement. An LLP also offers more flexibility as the roles are defined for each partner.
Limited liability partnerships (LLPs) are often used by licensed professionals and are entities that are created according to the law of a state.
Each partner, in this type of agreement, has a limited liability, which means his or her liability only extends to the amount of his or her investment in the business. This type of partnership is advantageous if you want to protect your assets in the case of a lawsuit.
Another one of the limited partnership advantages is that this type of structure is also easy to set up. State law provides a clear protocol for establishing an LLP. Usually, the partners complete a form and file it with a state’s Secretary of State.
The pass-through taxation that is featured for this type of business set-up enables partners to avoid double taxation. Partners are only obligated for their income taxes.
The LLP is not taxed as a business.
Want to know more about limited liability partnership advantages and disadvantages?
Because the formation of an LLP requires that each partner define his or her roles, it is best to contact a lawyer to draft the agreement. Send me, Sam Mollaei Esq., a business lawyer an email at sam@mollaeilaw.com for further details and information.
Limited Liability Partnership Disadvantages
The main disadvantage of setting up an LLP is that some states do not recognize this type of entity as a business legally while others do not allow you to set up this type of partnership.
In some instances, states impose large tax limits on LLPs. Taxes may be assessed when registering the business.
Because of some of the lack of recognition that LLPs sometimes receive, they may not be seen as a credible business entity.
Advantages of Partnership in Business
Businesses, when conducting business as partnerships, do not have to pay income tax and are simple to establish. It is easier to raise funds, as well, when more than one owner is participating in the business.
Three essential benefits are derived when a general partnership is formed:
- All owners can share in the business’s profits and losses
- Joint ownership of the business exists
- Each partner has an equal right in managing the business
In a limited partnership, one partner is designated as a general partner with the other partners are considered limited partners. The general partner assumes management responsibilities for the business.
Limited partners in a limited partnership contribute to the business’s assets but do not assume a role in managing the company.
Advantages of Partnership Firm
The main advantages of a partnership firm are its borrowing capacity and division of labor. Each partner is responsible for playing a certain role while sharing in the profits, all of which makes everyone work harder to succeed.
One of the other advantages of partnership is that this type of legal entity is easy to establish and costs less to set up as compared to other business entities.
More skills and talent are available when you set up this type of firm and contact with clients is made easier. That is because all the partners in the business have access to the firm’s clients during the business.
Advantages of a Partnership Deed
When partnership terms are spelled out, you will receive several benefits. Not only do you reduce any issues with disputes, but you can also avoid any unexpected dissolution.
Disputes can happen when more than one person co-owns a business. To reduce this type of impact, it is helpful to create a deed that removes any type of assumption or conjecture.
Deeds or agreements should underscore the following:
- The reasons for forming the partnership; and
- The term of the partnership agreement and what situations will cause it to continue or end.
Agreements can also set out any agreed splits in profit and what type of dispute mediation will be used to settle disagreements.
A legal dispute, even if a business is small, can be expensive. Therefore, a partnership deed is extremely helpful in substantially reducing any ensuing costs.
Partnerships can end for one of several reasons. These reasons may include the death of a partner, the insolvency of a partner, the expiration of the partnership agreement, or when a partner offers written notice of his intent to end the partnership.
A partnership does not automatically have to end if a partnership deed is written to circumvent dissolution.
If you need an agreement of this type, don’t hesitate to send me, Sam Mollaei Esq., a business lawyer an email at sam@mollaeilaw.com. I can help you establish a deed that will take care of your legal needs in this respect.
Conclusion
Now that you have had the chance to digest the information on general and limited liability partnerships, what do you believe is the best business option when it comes to availing the advantages of partnership?
While this article gave you a good overview of partnership advantages and disadvantages, you may still need to explore the subject further.
Indeed, deciding to form a partnership or any kind of business entity can be complex. Plus, taxation for business also needs to be addressed.
If you have any questions, contact me, Sam Mollaei, Esq. at sam@mollaeilaw.com – I can help you form your partnership.
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