Types of Partnerships
In a business partnership, two or more people share ownership. Each partner contributes to the business and shares in the profits and losses of the business. There are three main types of partnerships that can be formed:
- General partnerships. In this type of partnership, profits, liability and management responsibilities are divided equally among the partners. If the responsibilities are distributed unequally, you must document that in the partnership agreement.
- Limited partnerships. In a limited partnership, the partners have both limited liability and limited control over management decisions, depending on their individual investment percentage.
- Joint ventures. This works as a general partnership for a limited period of time. Partners in a joint venture can become ongoing partners but they must file as such.
Depending on your business goals, any of these partnerships could be right for you.
Before entering into a partnership, it is important that the parties involved discuss their business goals and the roles that they will play in the company. A business agreement document should include the following:
- How future business decisions will be made
- How profits will be divided
- How disputes will be resolved
- How ownership changes will be handled
- How the partnership may be dissolved
These documents are not legally required, but highly recommended. They can be extremely helpful for future decision-making and dispute resolution.
Forming a partnership
In order to form a partnership, you must register your business with your state. You must also establish your business name. The legal name of your business is the name given in your partnership agreement. If you wish to run your business under a different name, you must file a fictitious name. After registering your business, the next step is filing the appropriate licenses and permits, which vary depending on state and industry.
Businesses must register with the IRS as well as state and local revenue agencies. General partnerships and limited partnerships are taxed in the same way. The business itself does not pay income taxes; the partners pay taxes on their individual share of the business via their personal tax returns. Form 1065 must be filed with the IRS, and each partner must file Schedule K. The individual owners’ shares of the partnership must be listed in each Schedule K.
Which type of partnership is right for you?
The type of partnership you ultimately choose depends on the type of business you are running and what your goals are. How you choose to structure your business will have major tax and legal consequences, so it is important to explore all of your options. For business owners who wish to have more say in the day-to-day operations of the business, a general partnership is a good option. If you choose a limited partnership, the partners will have limited input based on their investment percentage.