Unlike sole proprietor, the partnership is formed when there are two or more partners.
There are two forms of partnerships which are popular, general partnerships, and limited partnerships. In a limited partnership, there is one general partner and one or more limited partners. The general partner assumes the full responsibility for the management of the business and the limited partner contributes only assets to the business while having no role in the company’s management. In addition, the limited partners have limited liability for the company debts while the general partners may be an unlimited liability.
Advantages of a General Partnership:
Partnerships are pass through entities, they do not pay tax. EachPartnerships do not pay. Each partner files the profits or losses of the business on his or her own personal income tax return. There is no double taxation –one at corporate and one at shareholder level
Easy to start and establish
There is an increased ability to raise capital when there is more than one owner
Wider experience, knowledge, and skills can be utilized based on the partner’s skill set.
Division of responsibilities and improved management abilities as multiple partners are involved in the business.
Disadvantages of a General Partnership:
If a business does not have enough assets to pay back business debts, creditors can take the personal assets of the partners. There is an unlimited personal liability for general partners and therefore is very risky.
Independent decisions cannot be taken by the partners. They need to obtain the consent for major management decisions. In addition, transfer of membership interest may need to be approved by all other partners.
If there is a business litigation or dispute or death of the partners, there is always a danger of instability that may lead to dissolution.
Advantages of a Limited Partnership:
Partners are taxed through their personal income tax return popularly called to pass through taxation. It is easier to attract investors because limited partners have limited liability to the business debts.
Limited liability protection as partners is not responsible for unlimited debts of the business. Their liability is limited to their capital contribution in the business.
Limited partners can be passive investors. All profits and losses are passed through their profit allocation. Therefore individuals with time constraints and who have limited participation may elect to be treated as limited partners.
Disadvantages of a Limited Partnership:
The general partner is personally fully liable for the debts of the business.
Certificate of Limited Partnership must be filed with the state before the partnership comes into existence, which includes state fees.
All partnerships file form 1065 and they have issued forms K1 by March 15th each year. They must then file it along with their personal taxes.