Business Partnership types and their pros and cons.
Partnership in Business and Its Types
Partnership implies shared ownership where two people or more share the ownership of a single business. The partners don't just share the profits and losses of the business but contribute to every aspect of the business, whether it is the money, resources, labor, or even skills. Since a partnership is between two or more people, unlike sole proprietorships, developing a legal partnership agreement and discussing the critical issues before getting into one. It is even important for decision-making since there would be more than one person involved in its key decisions. The partnership agreement documents important things regarding the partnership, how important decisions will be made, and profit distribution and dispute resolution mechanisms. It also mentions how new partners can be brought in or old partners out. It documents the conditions for dissolving the partnership. Partnerships agreements are generally not legally required, but it is still strongly advisable to use one to avoid any legal difficulties. Operating without such a legal partnership agreement can be extremely risky.
In general there can be three types of partnerships:
General partnerships are partnerships in which the profits, liabilities, and duties are equally divided among the partners. If someone opts for an unequal distribution, the percentages are laid out clearly in the partnership agreements. The business is not taxed separately, but its profits and losses flow to the partners. The partners pay their individual tax returns. The legal and financial liabilities are of both the partners. Moreover, the partnership income is taxed as personal income. (See General Partnership)
Limited partnerships are not as simple as general partnerships and allow the partners limited liability and limited input with the management decisions. These limits depend on the amount of investment made by each partner. Such agreements are good for people investing in short-term projects. In limited partnerships, at least one person has to act as a general partner and at least one as a limited partner. The general partner, in this case, holds the personal liability as well as management authority for the business. The limited partners generally do not have any management-related obligations. Their risks are limited to the investments they have made into the business or any other risks listed in the partnership agreement. The partnership obligation of the general partners in case of limited partnerships is quite similar to that of the general partners in a general partnership. If the limited partners start participating in management activities, they lose the protection of being a limited partner.
Joint ventures are general partnerships formed for a limited period of time or a single project. Generally, each of the partners contributes to the assets and shares the risks involved in forming a joint venture. If the partners want their joint venture to be recognized as an ongoing partnership, they must file for it.
One is required to register his business with his state before forming a partnership which is generally done through the secretary of state’s office. One should also obtain the necessary licenses and permits once he has registered his business. Businesses, though they are required to register with the IRS, do not themselves pay the taxes. They are passed on to the individual partners. While filing their personal income tax returns, the partners include their own shares of profit or loss from the partnership.
Joint ventures are used widely across the industry by companies to gain entry into foreign markets. Foreign companies form joint ventures with the local companies where they bring new technologies and business practices. In contrast, domestic companies already have the necessary permits and relationships to run the venture.
Advantages of partnerships:
- Partnerships are easy as well as inexpensive to form. The only major thing to do before forming one is to develop the partnership agreement.
- Another major advantage is that the partners are equally committed to the business's success and can pool their resources to obtain capital. So, securing credit is also easier with partnerships as compared to sole proprietorships.
- Partners bring complementary skills, strengths, and resources that are beneficial for the business. Moreover, partnerships can make it easy to venture into new areas where one partner already has the necessary skills and experience, and others can bring in investment or other assets.
Disadvantages of Partnerships:
- One is not just responsible for his own decisions but also for the decisions made by his partners. Moreover, the personal assets of all the partners can be used to satisfy the business debts.
There may arise discord due to unequal contributions concerning efforts and time invested by each of the partners. The legal issues with partnerships can be slightly more complicated than sole proprietorships, where one is liable for his own actions and decisions only.