A business partnership is a business relationship between two or more people. Business partners, also known as owners, share in the company's profits and losses. They work together, often sharing expertise, skills, capital, and property. Many people find more comfort and support when starting a company with others rather than on their own; however, whether a business partnership is right for you depends on many factors.
This article will help you decide which type of partnership might work for you, plus the pros and cons of partnerships. We also provide some insight into how to form a business partnership and how Skynova can meet all of your small business software needs.
Types of Business Partnerships
Many small business owners benefit from having a partner to help them start, run, or grow their company. A partnership is a business structure that can be as informal or as formal as you prefer. Keep in mind that some states require certain types of partnerships to legally register their business or a partnership agreement with the government, while others do not. Check with the business department of your secretary of state's office to learn more. Here's a look at the different types of business partnerships typically formed in the U.S.
General Partnership (GP)
A general partnership is a common type of business structure in which two or more people own a business and share the company's:
- Financial liabilities
- Legal liabilities
A general partnership is a flexible business structure that gives the decision-making powers to the general partners and not to a board of directors, as would be the case if you formed a corporation. It also tends to be easier and more affordable to form a general partnership than a corporation. You should also be aware that owners assume unlimited liability with a general partnership. This means there's no cap on liabilities, so a partner's personal assets might be subject to seizure to pay off company debts.
Although a general partnership can be formed with a simple oral agreement, it's advised for legal purposes to create a formal, written agreement. This way, all roles, responsibilities, and liabilities are clearly defined and the business partnership agreement can be used to settle disputes between different entities as needed. The agreement can also be revised as necessary due to factors like business growth or changes to a partner's needs.
Limited Partnership (LP)
A limited partnership is a business entity that has one general partner with unlimited personal liability and one or more limited partners. The general partner takes on more personal risk, earning them the right to more control over decision-making within the company. Limited partners are sometimes referred to as silent partners, as many only invest in the company. They don't often become involved in business decisions and can only lose up to their total investment amount in the company.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a business venture that offers the most liability protection to individual partners. LLPs are useful for groups of professionals like attorneys or accountants. Each partner enjoys a share of the profits, a division of labor, and equal liability protection. Partners are only held liable for what they invested in the company should the business fail.
An LLP is a customizable business organization that protects owners' personal assets while allowing them to equally manage the company. State law usually requires an LLP to register with the state, submit a written partnership agreement, and follow annual reporting requirements to the proper government authority.
Advantages of Business Partnerships
Owning a small business startup may feel overwhelming to a first-time business owner, especially if you're trying to do everything by yourself. Entering into a partnership with friends, family members, or others who share your business goals comes with many advantages. Partners share knowledge, skills, and expertise with each other to benefit the company and increase the business's chance of success.
Partners also increase the amount of capital available for a new business. Depending on the type of partnership you form, you can choose how involved these investors are in your day-to-day operations. Having partners also means you can divide the work that needs to be done so you aren't responsible for all business operations. For example, one person can manage the company's social media while another handles the finances and accounting.
Disadvantages of Business Partnerships
A partnership may not be the best choice for your business if you don't want to share the responsibility of making business decisions. It's also possible that you'll earn less profit from your business because you'll have to share the revenue with your partners. A partnership may not be right for your new business venture if the chances of success are low. Certain partnership structures don't protect your personal assets from the company's failure.
How Is a Limited Liability Company (LLC) Different From a Partnership?
A limited liability company (LLC) is sometimes confused with a partnership because it can be formed by multiple people known as members. Some business owners choose to form an LLC to keep their personal assets separate and protected from their company's finances. Other benefits of forming an LLC include simplicity, flexibility, and credibility. One downside is that it can cost more to form an LLC than some types of partnerships.
How the IRS taxes an LLC depends on the number of members it has, plus how the company has elected to be taxed. LLCs are known as pass-through entities, where profits and losses usually pass through the company to the owner's personal income tax return. For tax purposes, LLCs with two members or more may choose to be taxed as a partnership or corporation. Talk to a tax professional to fully understand your tax obligations and the best method for your company.
How to Form a Business Partnership
Forming a general business partnership can be as simple as shaking hands and committing to working together. However, not all businesses and partnerships are going to succeed with such an informal agreement. How to start a business partnership depends on the industry, the number of partners, state laws, and much more. Here are some general steps to take when forming a business partnership.
- Choose a business name and location. If you need a space for your business to operate, now is the time to choose one. Also, most states require business names to be registered with the secretary of state's office, so remember to check with them before having your storefront sign created. The secretary of state's office also checks to make sure your business name is unique and won't conflict with another registered name. You usually need to fill out a short application and pay a small registration fee.
- File for an employer identification number (EIN). If you plan to have employees and a business bank account, you'll need to file for an EIN from the IRS. It's a federal tax identification number used for tax purposes, and it's free to apply for an EIN online.
- Obtain necessary licenses and permits. Depending on the kind of business you plan to own, you may need licenses and/or permits to operate legally. Check with local, state, and federal licensing agencies to obtain the appropriate licenses and permits where necessary.
- Understand tax obligations. According to the IRS, a business partnership must file an annual information return to report the company's income and more. The business doesn't pay income tax because each partner reports their share of the income or loss on their personal tax return. Partnerships are required to give all partners copies of Schedule K-1 (Form 1065). Partners may also be subject to self-employment and other taxes.
- Open a business banking account. Once you have an EIN number, you can open a business bank account for your company. It's an action that helps keep your personal and business funds separate. A business bank account also enables the possibility of securing more funding and building a good credit history.
- Draft a partnership agreement. A partnership agreement is key to setting up a great working relationship with any partner. An agreement should include names, partner contributions, percentages of ownership, partner authority, division of work, and financial matters. It should also detail what to do if the partnership needs to change.
You'll also want to work with your partners to formulate a business plan. It can be as simple or as detailed as you need it to be. A great business plan is your guide to starting and running your business, and it can be submitted to others to gain investors. Other business partnership requirements that vary by location and industry are insurance coverage and the registration of your business with the state. Be sure to check with local business authorities and insurance professionals to understand your responsibilities as a partnership.
Rely on Skynova to Help You Manage Your Business Partnership Finances and More
Skynova's software modules and templates help business partnerships easily manage their finances and more from an online dashboard. Our user-friendly accounting software makes it simple to track expenses, income, sales tax, and payments. We also offer free templates for business documents like invoices and estimates. Reduce your paperwork and simplify your accounting by learning how to use Skynova small business products today.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional lawyer and your state government officials to ensure your business is legally formed, licensed, and insured for operation. Also, consult with a professional accountant to ensure you're meeting accounting standards and annual tax obligations.