Forming a partnership can be an excellent option for those who want to start their own company or join forces with someone else in a joint venture or sole proprietorship. It would be best to learn about the different types of partnerships and how they differ from other business structures.
However, a sole proprietorship is the riskiest for personal assets because of the minimum filing requirements required for its formation. Business owners with substantial assets cannot shield their assets from business creditors in the same way corporations or partnerships can shield theirs.
A corporation provides limited liability protection for the personal funds of its owners and the ability to raise capital through the issuance of stock. Creditors of a corporation cannot seize the personal assets of its owners as compensation for legal actions taken with the consent of the corporation. When it comes to issuing stock, creating bylaws and resolutions, and other legal formalities, a corporation entails the most paperwork and legal formalities.
Corporate tax rates will apply unless you qualify and choose to be taxed as a subchapter S corporation, also known as an S corp. To qualify as an S corporation, a business must have no more than 75 shareholders, be limited to issuing a single class of stock, and be free of non-U.S. citizens or resident alien shareholders.
One of the most common types of joint venture partnerships is the one that is formed for a specific project, not an ongoing business venture.
In a partnership, an agreement template is used to layout the roles and responsibilities of each partner. The partnership agreement specifies how profits will be divided, who is responsible for what, how the partnership will be managed, and who will make decisions. You can use a buy-sell agreement to control the ownership and management of your company if you or one of your partners dies or becomes incapacitated. As a result, partnership income can be taxed at the individual tax rate of each partner rather than the corporate tax rate. Personal assets aren’t as protected in a partnership as in a corporation, but that doesn’t mean it’s a bad option.
Two types of partners are involved in a limited partnership.
As long as they don’t get involved in running the company, limited partners don’t have to worry about being held liable for its financial decisions. It is the general partner’s job to run the company. Limited liability for debts of the general partnership is also a risk.
In a master limited partnership, tax advantages of a limited partnership are combined with the ability to raise capital by trading shares on the stock market. According to IRS regulations, master limited partnerships must derive their income from “qualifying sources,” such as the extraction, processing, or transportation of fossil fuels like oil, gas, or coal.
US Legal Forms offers a wide variety of partnership agreement templates, including buy-sell agreements and other related forms, for any partnership. We have state-specific forms and packages for any business partnership you may have.
A Partnership’s Qualities
A partnership is a legal entity, just like a corporation. Legally, it can own property and be held accountable for its conduct. Even though the partners own it, it is an independent entity. It’s important to note that partnerships are distinct from other forms of business. A partnership has the following characteristics:
Consensus-building: When two or more people agree to form a partnership, they do so voluntarily. As a result, the partners must have a written agreement outlining who contributes assets or services, performs what functions, and how profits and losses and any additional compensation are split. According to the Uniform Partnership Act (UPA) or the Revised Uniform Partnership Act (RUPA), this agreement should be in writing depending on where the partnership is located.
Limits on how long one can live in most cases, a partnership’s life span is determined by agreement. In contrast to corporations, which can exist for an infinite amount of time, partnerships must be terminated when a new partner is accepted, a partner leaves or the partnership dissolves.
Each other’s cooperation. When two or more people form a partnership, they are referred to as “agents.” When dealing with vendors and lenders, each partner can represent the partnership as a whole. As a result, each partner’s actions are bound by the partnership’s activities.
Liability is unlimited: The partnership’s debt can be incurred by any one of its partners because of the partnership’s mutual agency. Regardless of who negotiated the debt, debts incurred by a partnership must be paid by all partners. Exceptions can be made, but only in the case of partners who meet the requirements of a limited partnership (which you will learn about later in this chapter). As a general partner, you are personally responsible for the company’s debt.
Partnership income that is not subject to taxation. Although the company is a separate legal entity from its partners, the federal tax does not apply to the partnership’s net income. Because it is a partnership, its income or loss is split among the partners and reported on each partner’s Tax Form K-1, according to the partnership agreement and tax law. Using the information on each partner’s K-1, tax is paid at each partner’s tax rate, based on their respective K-1 tax information.
No matter how much money is taken out of the partnership each year, the partners are still taxed on their taxable income.
Having a stake in a piece of land together. All of the partners own the assets of a partnership. Upon dissolution, each partner is entitled to a portion of the company’s assets based on their equity in the company. This rule does not apply to specific assets.
Instead of raising money by issuing stock, a partnership’s only option is to incur more debt or increase the amount of money that each partner contributes to the company. These partnerships are unable to increase because of this.
Taking part in both the gain and the loss: Under the partnership agreement, the partnership’s net income or loss is distributed. A partnership agreement does not specify how each partner will share in net profits or losses.