| What You Need to Know About Forming a Business Partnership:
Why Forming a Business Partner Might Make Sense:
Just What is a Business Partnership?
A partnership is one of the four general ways you can choose to organize your business.
John D. Rockefeller once said, "It's better to have a friendship based
on a business partnership than a business partnership based on a
That is why it is important for a partnership to follow good business principles.
General or Limited Partnership - You Decide:
A partnership is a business jointly owned by two or
more individuals. Each of the individuals is personally liable for the
debts of the partnership.
Forming a business partnership can be done with a handshake—and often they are. In fact, partnerships are the only business entities that can be formed by oral agreement.
course, as with any important legal relationship, oral agreements often
lead to misunderstandings, which often lead to disputes. That is why
you should only form a partnership that is created with a written
The first kind of partnership is a general
partnership. A general partnership does not have to register with the
state and no legal agreement is necessary, though as we stated earlier,
it is highly recommended.
For general partnerships, each of the partners, known as "general partners":
- Helps run the company.
- Is liable for all debts.
- Shares equally in the profits and shares as well as losses.
- Must consent in the sales of assets.
you form a partnership, you and your partner are considered co-owners
and are taxed according to your share of the partnership profits.
other form of partnership is the limited partnership (LP). A limited
partnership has both general partners and limited partners, but must
have one or more general partners. As in general partnerships, general
partners run the business and are liable for partnership debts. A
limited partner, on the other hand:
A limited partnership must have at least two different partners and must file the partnership with the state.
- Does not participate in the running of the business.
- Is liable only up to the amount of their investment.
Partnerships and Capital Needs:
The advantages of a partnership are similar to those of a sole proprietorship.
additional benefit is that a partnership allows for additional capital
and management resources, since more than one person is contributing to
Other Advantages Include:
- Low costs, paperwork, and state registrations.
- No double income taxes.
Liabilities of Partnerships:
The biggest disadvantage of a partnership is the
same as for a sole proprietorship: liability. There is added liability
in a partnership because you will be liable for your partner's actions
and debts as well as your own.
Other disadvantages include:
- Any partner can make a decision without the other and that decision is binding.
- Contributions to the partnership become part of the partnership and are shared equally, even if one partner contributes more.
Forming a partnership can be a real benefit for
your business. It can be complicated, though, to form the best
agreements possible. To give your partnership the best chance for
success, you should strongly consider consulting with an experienced
business attorney before opening for business.
Next In This Guide
Forming a Corporation - Preferred Choice for Liability and Taxes
- A corporation is a separate legal entity that acts as a single person
and is created under statutory law. The corporation owns the business
and, in turn, the corporation issues shares of stock to individuals
investing in it.
Previous In This guide
Forming a Sole Proprietorship -
An Easy Way to Get Your Business Organized
- There are many different forms your business can take. The sole
proprietorship is one of the most common forms. As with any business
decision, being a sole proprietor has distinct advantages and
Table of Contents
How to Start a Small Business