The Advantages and Disadvantages of Forming a Business Partnership
Choosing the Right Form for Your Business Venture
If you’re planning on starting a new business enterprise, one of the most important decisions you’ll have to make involves the choice of business entity. In many respects, a partnership can be one the easiest ways to commence business operations, but there are risks involved with this type of business structure.
What Is a Partnership?
A partnership is a company comprised of at least two people, who typically provide an investment and take part in the management of operations. In a true partnership, the profits and losses of the business are equally shared. There’s generally no requirement that you prepare a partnership agreement, but it’s in your best interests to do so, as you will have documentary evidence of the rights and responsibilities of all parties. Make certain your partnership agreements includes language that addresses:
- How and when earnings will be distributed to partners
- How disagreements between partners will be resolved
- How new partners may be brought in
- How the partnership will be dissolved, if necessary
There are two distinct types of partnerships—a general partnership and a limited partnership. In a general partnership, everything is typically distributed evenly among partners. In a limited partnership, there are two different types of partners—the general partner(s) and the limited partner(s). The limited partners typically have limited liability, but they also have limited access to the profits of the company.
The Advantages and Disadvantages of a Partnership
The advantages of a partnership include:
- Ease of formation and maintenance—Most states, including Texas, do not require the preparation and execution of a partnership agreement. You must, however, file a certificate of formation in Texas. There are also few annual reporting requirements.
- Pass-through taxation—A partnership passes through any income, which is taxed only at the individual partner level. There is no tax on the partnership.
- It allows you to pool resources and talents with others without much difficulty or paperwork
- The decision-making can be much easier—You don’t need a corporate resolution and may not need to call a meeting of the partners to make a decision
The disadvantages of a partnership include:
- They are just as easy to dissolve as they are to form
- Liability for the debts of the partnership passes through, so that partners may be personally liable for those obligations
At MCIS Law, PLLC, in Stafford, we aggressively advocate for businesses and individuals in southeast Texas. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.