New Venture Lab: Equipping Christian Entrepreneurs

Question

Can you please tell me more about Partnerships?

Answer

Description: A partnership is typically used when two or more people share ownership of a single business.  A partnership is usually owned by the partners that exercise day-to-day control over the company and is, for liability, profit and tax purposes, considered commingled with each partner's individual taxes without an separation as a separate business entity. It is highly recommended that the partners have a clear legal agreement that sets forth the business strategy, time commitment, capital commitment, decision-making process, profit sharing process, dispute resolution process, additional partner process, partner departure process and partnership dissolution process.

Advantages of a Partnership :

• While partnerships are relatively easy to establish, time and effort must be committed up-front to the partnership agreement
• The more partners, the easier fund-raising should be among the partners
• It should be easier to round out the skills of the partners who have complementary skills
• It may be easier to attract employees if they have the incentive and ambition to become partners in the firm (think law firm or consulting firm)
• The partners receive all income (split according to the partnership agreement), which is taxed as personal income

Disadvantages of a Partnership:

• Partners are jointly and individually liable for the actions of the other partners (watch out here for any "yoking" issues that would arise if you partner with a non-believer or someone that does not share your core values and integrity)
• Profits must be shared with the other partners according to the agreement, even if partners have not contributed proportionately
• Partnerships can easily lead to disagreements and even dissolution
• The partnership structure has some limits on the deductibility of certain types of employee benefits
• Partnerships often cease or fail upon the withdrawal or death of one of the partners, so succession and longevity or perpetuity can be an issue

Types of Partnerships:

1. General Partnership: Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
2. Limited Partnership (alternatively Partnership with limited liability
   Limited):  Most of the partners have limited liability (to the extent of their investment) as well as limited control regarding governance and management decisions. This form of ownership is most often used for investment activities such as real estate development, venture capital, hedge funds and private equity where the general partner contributes management time and attention, while the limited partner contributes capital. Limited partnerships are more complex and formal than general partnerships.
3. Joint Venture:  Joint ventures are typically partnerships between companies (but it could be individuals or a mix of the two) and act like a general partnership, but typically for a limited purpose or time or perhaps a single project.

Federal Tax Forms for Partnerships  (others may apply)

• Form 1065: Partnership Return of Income
• Form 1065 K-1: Partner's Share of Income, Credit, Deductions
• Form 4562: Depreciation
• Form 1040: Individual Income Tax Return
• Schedule E: Supplemental Income and Loss
• Schedule SE: Self-Employment Tax
• Form 1040-ES: Estimated Tax for Individuals
• Employment Tax Forms