If you have business partners, you have the option of forming a partnership instead
of incorporating. Should you choose this route, experts highly recommend that you
formalize this relationship by creating a written general partnership agreement that
will protect all parties involved. It is possible to have a partnership without a formal
agreement, in which case you will be governed by the Uniform Partnership Act, but
this allows for little flexibility or protection in events such as one partner leaving. A
written contract, on the other hand, will spell out exactly what each partner's rights
and responsibilities are.
The chief benefit of a general partnership is that you have someone with whom to
share the business burden. It will also probably cost less and require less paperwork
to form a partnership than a corporation. In addition to the written partnership
agreement, you may have to file a partnership certificate registering the company's
name, and perhaps obtain a business license as well. These requirements vary from
state to state and locality to locality, so check with your county clerk's office to find
out the specific requirements for your region.
If you do form a partnership, each year you have to file a partnership information
return that tells the IRS and state officials how much the partnership earned or lost,
and how those gains and losses are to be divided among the partners. The
partnership itself does not pay income taxes. Instead, the partners report this
information and pay taxes on their shares on their personal returns, similar to a sole
proprietorship.
The downside of partnerships is that you are personally responsible for your
partner's liabilities related to the business. One partner can take actions - such as
signing a contract - that legally bind the partnership entity, even if all the partners
were not consulted. Each partner is also personally liable for injuries caused by one
partner on company business. In other words, if one partner causes an accident
while making a delivery with the company van, all partnership assets, as well as
each partner's personal assets, are at risk. Of course, a partnership can protect itself
against such risks by carrying the proper insurance.
Benefits
- Provide a way to share the business burden
- Simpler paperwork and less cost than incorporation
Disadvantages
- All partners personally liable for the business actions of a single partner