Forming a business partnership has the advantage of bringing the strengths and experiences of two or more people together for the company good. It also allows for the pooling of financial resources. As with all human relationships, however, a business partnership can become tense and dissolve because the people involved could no longer work together. It’s important to understand that the Internal Revenue Service (IRS) may view your business venture as a partnership whether you have filed formal paperwork to that effect or not.
Benefits of Officially Forming a Business Partnership
This type of business entity is one of the easiest to establish. It’s also inexpensive. You and your partners don’t need to follow formal steps to establish a partnership as you would with a corporation. Your state will automatically issue you a business partnership if you start the company with at least one other person and you did so with the intention of earning a percentage of profits from the new business.
Partnership agreements are also simpler when it comes to filing business taxes. Typically, a business partnership qualifies for a pass-through arrangement with their federal and state income taxes. This means that each partner files and pays taxes individually and not on behalf of the company. From the perspective of the IRS, the partnership business is simply a source of information that tells them about the income and expenses of each partner.
You May Be Putting Your Personal Assets at Risk
Under a business partnership agreement, each member of the partnership agrees to be severally and jointly responsible for business debts, which could put mean risking your personal assets. Creditors can also sue just one person of the partnership and it’s up to him or her to collect the fair portion of the other partners.
Before agreeing to a partnership agreement, you need to carefully consider that you may not receive initial contributions back and that you must share profits with other partners based on their percentage of investment.
These are just a handful of potential pros and cons of business partnership arrangements. Please schedule a consultation with Safe Harbor Commercial Capital to explore this topic further.