In daily business, you are certainly no stranger to the term partnership or partnership. This concept is used to describe a business that is run between two or more parties. Here’s an article that includes all the information you need to understand business partnerships.
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Business Partnerships: Sharing the Load
A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor, or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision-making process, it’s essential to discuss various issues and develop a legal partnership agreement. This agreement should document future business decisions, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners), and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended, and operating without one is considered extremely risky.
Types of Partnerships:
General Partnerships assume that partners' profits, liability, and management duties are divided equally. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability and input with management decisions. These limits depend on the extent of each partner's investment percentage. Limited Partnerships are attractive to investors of short-term projects.
Joint Ventures act as general partnerships, but for only a limited period or a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.
Advantages of a Partnership
Easy and Inexpensive—A partnership is generally an inexpensive and easily formed business structure. The majority of time spent starting a partnership often focuses on developing the partnership agreement.
Shared Financial Commitment—In a partnership, partners are equally invested in the business's success. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in securing credit or simply doubling your seed money.
Complementary Skills—A good partnership should reap the benefits of utilizing each partner's strengths, resources, and expertise.
Partnership Incentives for Employees—Partnerships have an employment advantage over other entities if they offer employees the opportunity to become partners. Partnership incentives often attract highly motivated and qualified employees.
Partnership Taxes
Most businesses must register with the IRS, state, and local revenue agencies and obtain a tax ID number or permit.
A partnership must file an annual information return to report the income, deductions, gains, and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business passes through any profits or losses to its partners. Partners include their respective share of the partnership’s income or loss on their tax returns. Partnership Taxes generally include:
Annual Return Of Income
Employment Taxes
Excise Taxes
Build a Lasting, Successful Partnership
There are times in business when it pays to be that wildly optimistic, starry-eyed dreamer. Launching a partnership calls for more of a skeptical approach.
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