From Bill Hewlett and David Packard, Google’s Larry Page and Sergey Brin, even Ben and Jerry – some of the biggest success stories in recent business history have hinged on collaborative business partnerships.
Asides from aspiring to blaze a trail in the mode of these history makers, business partnerships offer small business owners many benefits in areas such as taxation, shared risk, access to funds, etc.
So whether you are looking to partner with your best friend, former boss, or even your spouse, here are some of the options and considerations every small business owner should know before diving into business partnership.
Benefits of Business Partnerships
Each state has different laws that apply to business partnerships, but generally small business owners who enter into a legal partnership will enjoy the following operational benefits:
- Business partnerships are relatively simple to set up and partners can share the start-up costs; however take the time to develop a legal partnership agreement and don’t forget an exit strategy
- Record keeping is typically less than that of a corporation
- ncome is taxed only once (corporations are taxed both on their income and on the share of the corporation’s income that they receive as dividends)
Disadvantages of Business Partnerships
I’ve witnessed seemingly rock solid friendships destroyed as a result of partnerships going awry – sometimes leading to mutual law suits and bankruptcy.
So while there are clear benefits to partnerships, especially for start-ups and small businesses, as with all business decisions be sure to weigh the risks and understand the flipside to those benefits that I described above:
- Partners are jointly and individually liable for the actions of the other partners. What does this mean? If your partner dies, or goes AWOL, you’ll be liable for all the debts, not just half of them.
- You’ll have to share profits with others
- Since decisions are shared, disagreements can occur
- Some employee benefits are not deductible from business income on tax returns
- The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
Forming a Partnership: Business Structure Options
As I mention above, each state has specific laws on the formation and dissolution of business partnerships as well as laws regarding the legal responsibilities of each partner. There are three forms of legal partnerships that business owners can consider – general partnership, limited partnership and partnership with limited liability, or a joint venture. You can get more detailed information about these three types of partnership from the Small Business Administration here.
Have a Business Partnership Agreement
Once you’ve decided on the structure of your business partnership, much like a pre-nuptual agreement, you need to put pen to paper and record a partner agreement. The agreement should include:
- The business name, structure, and partner information
- A description of the type of business that will be conducted
- How decisions will be made, the duties and responsibilities of the partners, as well as any limitations
- Details of any current or future financial contributions any partner will make
- How profits and losses will be handled
- A plan for dissolution, or your exit strategy
The Tax Obligations of Business Partnerships
As a business entity, the partnership itself does not pay taxes – each partner pays federal, state, and local taxes on their income from the partnership as if it were personal income.
Partnerships do, however, need to file an annual “information return” to report income, deductions, gains, losses, etc. with the IRS.
Once you are operational as a partnership you can refer to information provided by the IRS here to help you determine some of the forms that you may be required to file.
You can find out more information about complying with tax laws for business partnerships via the IRS’ “Tax Information for Partnerships” Web page.
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