What are the key advantages and disadvantages of a business partnership?
First, though, what is a business partnership?
A business partnership is where the owners of a business have a personal liability that is unlimited when it comes to the business and what it does in order to operate.
The business owners invest their own money and their own time into the business.
As such, proportionally, they take a share of all profits that the business earns.
They also have to share any losses the business makes.
Limited Partners
The business may also have a number of limited partners involved.
Limited partners contribute funds to the running of the business, but they are not involved in operations of the business in a day-to-day fashion.
A limited partner remains liable for their investment in the business. In other words, should the business go bankrupt, for example, the limited partner only loses the amount of their investment.
Should there be limited partners within the business, there must, likewise, be a general partner who is designated.
This designated general partner must also be an active manager within the business.
Essentially, the designated partner carries the same liabilities as does a sole proprietor.
The main advantages of a business partnership are:
1 Specialization
If there are a number of general partners in the business, then there’s a diversity of skills available.
For obvious reasons, given that the skills available are business focused, this can work to enhance the performance of the business.
Essentially, the business has more opportunity to thrive since there is more expertise on hand to run it.
2 Capital
When there are a number of business partners in a partnership working together, this would usually mean that the source of capital available to run it will be rich.
Should the business operate as a sole proprietorship, it could mean that the source of capital available to run it is in limited supply.
3 No double taxation
Often, a corporation has to deal with double taxation.
On the other hand, a business partnership has no double taxation. Rather, any and all profits go directly to the business owners.
4 Tax filings are minimal
A business partnership in the U.S. needs to file IRS Form 1065.
This form, besides being minimal in terms of tax filings, is not complicated.
Disadvantages of a business partnership:
1 Have to pay self-employment taxes
A 15.3 percent tax rate for Medicare and social security is applied to every business partner’s share of the business’s ordinary income (profit).
Some ordinary income may be exempt from self-employment taxes. It’s best to consult with your accountant.
The ordinary income is reported via a Schedule K-1.
2 Unlimited liability
All general partners within a business must share unlimited personal liability with regards to the partnership’s obligations.
This is known as a “joint and several liability.”
In basic terms, a joint and several liability is where creditors are able to pursue any one of the general partners for the entire business’s financial obligations.
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