How Does a Partnership Work: Everything You Need to Know
How does a partnership work is a common question amongst business owners wanting to create a formal business partnership. 3 min read
How does a partnership work is a common question amongst business owners wanting to create a formal business partnership. When two or more individuals form a partnership, they often bring together their knowledge, background, financial resources, and connections to help their business succeed. Sometimes, however, partners have different short and long-term goals and objectives. While a partnership can be a great business structure for many, it might not be the best type of business for everyone.
Business Partnership Defined
A business partnership involves two or more people coming together to form a business of some kind. The partners will generally pool their money together in an effort to raise capital for the company’s initial operations. The partnership business structure, unlike the corporate structure, is not a separate entity from the individual owners. Therefore, the partnership will not provide limited liability protection as the corporation and LLC provide.
Furthermore, unlike the LLC or corporation, there is much less paperwork when forming a partnership. In essence, the partnership works similarly to that of the sole proprietorship, as the owners in both types of business structures don’t benefit from limited liability protection and these entities both operate as pass-through tax entities wherein the owners will report the businesses profits on their personal tax returns.
Advantages of a Partnership
There are many advantages to operating a partnership, including the following:
- The partnership is simple and cheap to form
- Tax requirements for a partnership are less formal and simple to fill out
- The partnership business structure can attract potential employees who might want to become a partner in the future
Once you and your business partner have created an idea for a company, you’ll want to spend a great deal of time working with one another to plan how you will oversee the business. Before setting up the business, first identify your short and long-term goals. What do you see for your business? Do you want to hire employees? Do you ultimately have a long-term goal of converting to a corporation and offering stock to the public? Do you want to bring on new partners if your company succeeds?
These are all important items to discuss with your potential new business partner, as you want to avoid any potential pitfalls and arguments down the line before you and your business get started. Such disagreements could ultimately lead to dissolution of the business.
Particularly, forming a partnership is cheap and straightforward. There are no formal steps to forming your partnership, as there is with a corporation. Additionally, there are no significant fees associated with forming a partnership. Since the general partnership operates as a pass-through tax entity, similar to that of an LLC, your partnership doesn’t pay corporate income taxes. Instead, the partners will report the profits and losses from the partnership on their personal income tax returns. While the partnership isn’t required to pay corporate income taxes, the business must still submit an informational return that provides the IRS with the company’s profits, expenses, and losses, while also identifying the share of partnership income that will be reported on the partners’ personal income tax returns.
The partnership business structure can be attractive to potential employees. Such employees might have an ability to also become a partner should the company be doing well at any given point in the future.
A joint venture is an agreement between two or more businesses that agree to share resources, expenses, employees, and other items to accomplish a shared goal. The joint venture might not have a purpose of making a profit, as it can be entered into solely in an attempt to offset the costs and risks as opposed to having one company take on all of the risk.
Generally, the joint venture will be limited in scope and time. Therefore, after the period of time has ended, so too has the joint venture agreement. Similarly, if the goal has been achieved, then the joint venture agreement will end. There are a few ways to establish a joint venture, including setting up a brand new business entity that will handle all of the joint venture efforts and tasks. It can be a corporation, LLC, or partnership. However, you need not establish a formal business structure for a joint venture. It can be a simple written agreement between the two businesses.
If you need help learning more about partnerships, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.