Partnership: It Takes Two or More to Tango
Everyone knows people who wouldn’t dream of going to the movies by themselves. Or out to dinner. Or to a party. Or to the beach. Or you name it.
Some entrepreneurs would never go it alone in the business world. They want partners.
The advantages of a partnership are clear: shared work, shared financial burdens, and shared risk. Partners may also bring talents and expertise to the business that sole proprietors may not have alone. All good stuff.
There are disadvantages, too. Sharing responsibilities, control over the company, and profits and losses can be more complicated and difficult than going it alone. Here are some major factors to consider when deciding whether a general partnership is the best way to structure your business.
Complexity and Expense
While it is more complex to organize than a sole proprietorship, a general partnership still involves fewer formalities and legal restrictions than other types of business organizations. Basic elements of are established by state law, but most issues are decided by a written agreement between partners.
As a partner, you may be personally liable for up to the full amount of the debts of the business, even if the debts exceed the amount of your investment. Partners with greater personal assets risk losing more than those with few assets.
Distribution of Profits and Losses
Profits and losses are passed through to the partners as specified in the partnership agreement. If left unspecified, profits and losses are shared equally among the partners.
Management Control and Decision-Making
As a general rule, all partners share equally in the right and responsibility to manage and control the business. A formal agreement may delegate some decisions or duties to certain partners, but ultimate responsibility rests with all partners.
Financing Startup and Operation
In most cases, a partnership will be able to raise capital more easily than a sole proprietorship, but not as easily as a corporation. The borrowing power of each partner may be pooled to raise capital, or additional partners may be admitted to increase borrowing power. Assets of the individual partners are used to secure loans.
Transferability of Ownership Interest
Transfer of a partner’s ownership in a business is determined by the partnership agreement – or by state law if there is no formal agreement. There are other rules about how – or if – new partners may be admitted.
A general partnership, like a sole proprietorship, operates with relatively few government controls. Most issues are determined by the partnership agreement. No special partnership reports or filings with government are required. The Revised Uniform Partnership Act (RUPA) provides rules for basic questions of partnership management.
The partnership itself is not a taxable entity. It serves as a conduit to pass income, deductions and credits to individual partners. Each partner is taxed on his or her share as defined in the partnership agreement.
Consultants at our Small Business Assistance Office can help you understand more about partnerships. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
Our Guide to Starting a Business in Minnesota provides a detailed look at this and other important issues.