Basics of a general partnership - KCTV5

Basics of a general partnership


If you have business partners, you have the option of forming a partnership instead of incorporating. Should you choose this route, experts highly recommend that you formalize this relationship by creating a written general partnership agreement that will protect all parties involved. It is possible to have a partnership without a formal agreement, in which case you will be governed by the Uniform Partnership Act, but this allows for little flexibility or protection in events such as one partner leaving. A written contract, on the other hand, will spell out exactly what each partner's rights and responsibilities are.

The chief benefit of a general partnership is that you have someone with whom to share the business burden. It will also probably cost less and require less paperwork to form a partnership than a corporation. In addition to the written partnership agreement, you may have to file a partnership certificate registering the company's name, and perhaps obtain a business license as well. These requirements vary from state to state and locality to locality, so check with your county clerk's office to find out the specific requirements for your region.

If you do form a partnership, each year you have to file a partnership information return that tells the IRS and state officials how much the partnership earned or lost, and how those gains and losses are to be divided among the partners. The partnership itself does not pay income taxes. Instead, the partners report this information and pay taxes on their shares on their personal returns, similar to a sole proprietorship.

The downside of partnerships is that you are personally responsible for your partner's liabilities related to the business. One partner can take actions - such as signing a contract - that legally bind the partnership entity, even if all the partners were not consulted. Each partner is also personally liable for injuries caused by one partner on company business. In other words, if one partner causes an accident while making a delivery with the company van, all partnership assets, as well as each partner's personal assets, are at risk. Of course, a partnership can protect itself against such risks by carrying the proper insurance.


Benefits

  • Provide a way to share the business burden
  • Simpler paperwork and less cost than incorporation



Disadvantages

  • All partners personally liable for the business actions of a single partner

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