The advantages and disadvantages of a partnership are important factors to consider when forming a business entity. A few partnership benefits include the flexible structure and favorable tax treatment for all parties. However, there can be drawbacks to a partnership that every new business owner should consider before making a decision. If you would like to learn more about the pros and cons of a partnership, consider contacting an experienced San Francisco business attorney from Von Rock Law by calling (866) 720-0195 to schedule a consultation.
How Does a Partnership Differ from Other Business Entities?
According to the Internal Revenue Service (IRS), sole proprietorships and corporations are the most common business entities. However, a partnership may be beneficial in many situations. Partnerships are business structures in which two or more individuals provide capital and manage the business. These business structures are, however, a bit more complex than that definition. There are three main types of partnerships, including the:
- General partnership
- Limited partnership
- Limited liability partnership
General Partnership
The owners of a general partnership share the same tax filing status and report the business’s income and expenses on their individual income tax returns. One advantage of this type of partnership is that there is no limit to the number of partners in a general partnership. Finding a partner to share management duties in this arrangement may be less complicated than other types of partnerships.
Limited Partnership
In this type of partnership, one partner assumes responsibility for managing the business and accepts full liability for the partnership’s obligations. Another partner, who does not participate in management, assumes limited liability. Often, the limited partners in this type of partnership are investors.
Limited Liability Partnership (LLP)
As with limited liability corporations, the partners of an LLP are typically not liable for another partner’s act of negligence. All losses and profits are passed to all the partners. With this structure, the partners can select between a decentralized or centralized management system. If you are ready to form a partnership for your business, a skilled business attorney from Von Rock Law may be able to help.
Pros of a Partnership
A partnership is a simple business structure that requires minimal paperwork. Some cities and states require businesses to remain compliant with their laws and regulations, meaning that these business structures could require additional paperwork initially to form the partnership. Choosing a business structure involves making many important decisions.
Partnerships offer many benefits, but business owners will need to understand the demands of their companies and how operations can affect the business structure. When choosing the business structure that will best suit your company, consider the nature of the business and whether a partnership would fit into future plans. The advantages include the following:
- Less startup capital than would be required for a corporation
- The opportunity to collaborate with active partners or investors
- The potential for greater profits
- Liability protection that can shield owners from personal responsibility for company debts
Collaboration
Partnerships can provide many benefits for those who invest in them. The biggest advantage of a partnership is that it allows two or more people to combine their efforts and work toward a common goal, allowing the partners to save money and combine resources. In a partnership, decision-making is relatively uncomplicated and inexpensive compared with the regulatory requirements of a corporation. Partnerships are a way for many people to work together to develop innovative ideas while keeping everyone motivated to contribute their skills and knowledge.
Profit-Sharing
Profit-sharing is one way to incentivize partners, and it can help to keep the partners moving toward one goal. Partnerships allow companies to access resources that other business entities, such as sole proprietorships, cannot. Specifically, profit-sharing agreements can help companies strengthen business connections and access available funds that may not be available through other means.
Cons of a Partnership
When a business owner understands the pros and cons of a partnership, he or she can weigh those advantages and disadvantages before deciding what business entity to form. Partnerships may be at increased risk of lawsuits, high administrative costs, and unlimited personal liability for partners. Partners in some partnerships are liable for the debts of the business. Additionally, partners can be held personally liable for the actions of other partners in certain circumstances.
Death of a Partner
General partnerships that lack formal provisions for the departure or death of a partner may disband. Partnerships can be formed easily, but they should have formal documents and procedures in place to ensure that the business will continue to operate in the event of certain situations, including the death of a partner.
Disputes
Since all partners share equally in profits, the company can suffer when partners do not contribute equally to the business. Having an agreement on file could be helpful in the event of partnership disputes that can hinder those contributions. A partnership, in which each partner shares in the responsibilities and profits of a business, can help joint business owners to avoid complicated bureaucracy within the company. However, disputes between partners can impede the decision-making process, especially if the partners have different visions for the company’s future. Partners in a business venture should agree to their respective contributions of capital and labor in advance, and they should specify those details in a partnership agreement.
Will a Partnership Work for Your Business?
According to the United States Small Business Administration, the business structure will affect every part of the company. Starting a company with one or several partners can be helpful. However, partnerships can also be challenging to navigate and may even dissolve if not planned carefully. Before entering into a business partnership, you may also want to consider consulting an attorney who can help ensure that the partnership or other business entity is adequately structured.
Contact a Business Attorney Today
As with any type of business decision, you will want to examine the pros and cons of a partnership. These business partnerships can provide plenty of benefits, but a few drawbacks exist when forming and enforcing these agreements. If you are ready to find the appropriate structure for your company, consider contacting an experienced California business attorney at Von Rock Law today by calling (866) 720-0195 to schedule a consultation.
