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A business partnership is an arrangement between two or more people. Partners own the business and work together to offer goods or services to their clients. They share business profits and losses. They also pool together their resources, such as money, property, and skills.
Sole proprietors can turn their businesses into partnerships. Partners also can form a limited liability company (LLC). Partnerships offer many benefits, whether you’re a consultant, freelancer, skilled trade worker, or other professional. To make the most informed decisions, it’s important to understand the pros and cons of a business partnership before engaging in one. Explore our guide below to see if forming a partnership is the right choice for you.
It’s important to consider these advantages and disadvantages before starting a new business venture. They can help you decide whether forming a partnership is right for you.
One of the best advantages of entering a partnership is that it gives you someone to rely on. Partners support one another and reach for the same goals. Everyone works together to make the business a success. Here are a few other business partnership pros to consider.
There are also some cons of a partnership to consider, which may outweigh the pros, depending on your situation. Also, you may not face some of these disadvantages until your business is past the initial startup phase.
Ready to form a general partnership? Follow these steps to form a general partnership.
When answering this question, be honest with yourself. There’s a big difference between thinking you can work well with other people and knowing you can. If you’re someone who works better alone, a partnership may not be the best choice, and that’s completely OK. A sole proprietorship still allows you to be a small business owner.
Depending on the partnership, you may have limited or unlimited liability. Consider carefully if you’re in a position to take on financial burdens and other liabilities as a partner. If you’re willing to be liable, seek professional financial advice to make sure you can do so.
Starting and running a business can be a stressful and tiring endeavor. A potential partner should be someone who complements you and your skill set. Keep in mind that personal relationships are much different than business relationships. It’s important that partners communicate well with each other. You need to be able to talk openly to solve problems and help the decision-making process go smoothly.
A partnership is the least expensive and simplest business structure to form. People who decide to go into business together can choose from four types of partnerships: a general partnership, limited partnership, limited liability partnership, or LLC. Learn more about how business partnerships are defined.
Although each business partnership structure is similar, they have key differences. Here’s a quick look at the partnerships, including how they work and how they are formed.
A general partnership (GP) is when two or more people agree to jointly own a business. They share all business assets, profits, and liabilities, including financial and legal liabilities. In a GP, each partner agrees to unlimited liability. This means partners can be sued or have personal assets seized to cover business debts and other liabilities. General partners are also required to file personal income tax returns that include any earnings from the business partnership.
People may choose general partnerships because they have a flexible business structure that allows the business owners to make decisions and control operations. For example, a father and son working in construction. They decide to form a partnership so they can be their own bosses and control which jobs they take and when.
General partnerships are also easier and less expensive to form. You usually don’t need to register a formal document with any government agency; however, it’s highly recommended that partners have a written partnership agreement. This document acts as a contract to outline operation rules and the responsibilities of each partner. The agreement will help to resolve future conflicts, too.
A limited partnership (LP) is a business of two or more people with one general partner and one or more limited partners. A general partner has unlimited liability, and they’re responsible for running the business. A limited partner has limited liability, profit limits, and less control over the business. Both partners pay personal income taxes on business profits, but only the general partner pays self-employment taxes, too.
People may choose to form an LP when others want to invest in their business and share profits but have a limited role in business operations. For example, an accountant and three siblings decide to form an accounting firm. The oldest sibling is the general partner, so they make most of the decisions and run the business as their full-time job. The three limited partners invest in the business with a chance to make a profit, but their personal assets aren’t at risk should the business fail.
To form a limited partnership, you’ll need to complete the appropriate forms for your state. You’ll need to file these documents, usually with the secretary of state’s office, and pay all applicable fees to be recognized as an LP. If you plan to operate in more than one state, you must check each state’s requirements.
A limited liability partnership (LLP) offers limited liability to every owner to protect all partners’ personal assets and income. It’s a lower-risk partnership option in which one partner’s actions don’t affect another. Partners come together to share resources, such as their expertise, clientele, and office space. An LLP is a flow-through entity for tax purposes, meaning each partner claims business profits when filing personal tax returns.
An LLP is a flexible business structure that allows partners to come and go. Professional groups tend to form LLPs to lower the cost of doing business while increasing the potential for business growth. Small law firms and consulting groups are prime examples of limited liability partnerships.
For example, a group of consultants decides to break off from a larger firm to form an LLP. They take on junior partners to deal with the detail work so they can focus on new clients to grow the business. Junior partners aren’t owners of the company and have no claim on profits; instead, they’re paid a salary.
To form an LLP, you must register your partnership with the state where you plan to do or are doing business. Forms are usually filed with the secretary of state’s business division with applicable fees. Requirements and costs vary by state.
The U.S. Small Business Administration (SBA) recommends partnerships for:
Not sure if LLPs are best for you? We compare LLPs and LLCs, another common entity type, to help you make your decision.
A limited liability company (LLC) is a business structure where the owners aren’t personally responsible for business debt or liabilities. Many existing general partnerships choose to form an LLC for this added protection of personal assets. LLCs can still be taxed as partnerships, so you can avoid paying business taxes. Partners in an LLC are known as members, and they’re free to choose their percentage of ownership in the business.
Limited liability companies are formed at the state level, usually with the secretary of state’s office. You’ll need to file a Certificate of Formation or Articles of Organization to register in the state where you plan to operate. It’s also usually required that you appoint a registered agent, apply for an employer identification number (EIN), and create an Operating Agreement.
You choose the filing option and add-on services that fit your needs like expedited filing speed, Employer Identification Number (EIN), Registered Agent, and Worry-Free compliance.
Our team collects and files all the necessary paperwork with the State to form your business based on the plan and time-frame you select at checkout.
This process can take a few days or a few weeks depending on the filing speed you select and the State’s internal processes and formation backlog.
The documents include your business formation certificate and employer identification number (EIN) assuming you purchased that additional service.
Our registered agent and worry-free compliance services ensure your company is always in good standing with the state.
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