Should I form a Partnership – Advantages and Disadvantages

When it comes to setting up your business, there are a lot of entities to choose from.  In this article we will look at the advantages and disadvantages of forming a general partnership.

Advantages

General partnerships can be started with minimal formality and require minimal reporting to government entities, both of which limit organizational costs.  Decision-making and actions taken can be informal and there are no requirements for doing business in other states.  Profits are taxed only once at the individual level, and losses can be claimed on personal income tax returns to offset income made in other ways.  Based on the partnership agreement, it can continue even after death, dissolution, or withdrawal of a partner, or it can be converted to a limited partnership, LLC, or corporation in a tax-free transaction.  Rights and interest in a partnership can be transferred, but the continuing partner has the right to approve or disapprove of any potential incoming partner.

 

Disadvantages

Partners are personally liable for all obligations and debts of the business.  Because all partners can act in management or bind the partnership to third party obligations, caution should be taken in selecting partners and the decision making process of the business can be cumbersome if partners don’t agree.  If not otherwise stated in the partnership agreement, the partnership dissolves when one partner dies, withdraws from the partnership, or declares bankruptcy or insanity.  Because the profits are taxed at the individual level, partners may be subject to self-employment taxes, and income taxes.

 

Overall, if you and your potential partner are interested more in ease of governance and equality in ownership and decision making, and are not worried about limitless liability then a general partnership may be right for you.

 

Photo By: Rob Brewer