The Partnership Requirements Of A Business

 

 A partnership is a business formation where a relationship exists between multiple persons who come together to carry on a business or trade. Each individual in the partnership will contribute property, money, labour or skill and in turn, share the profits and losses the business generates.  

Partnerships are required to file annual information returns with the Internal Revenue Service to report the income, deductions, losses, gains, etc. from its business operations. This tax obligation, however, does not include income taxes—a partnership does not have to pay federal income tax. Instead, the formation passes its income through; all profits or losses—and their attached tax obligation—are transferred to the individual partners of the formation. 

Each partner, therefore, must include his or her share of the formation’s income or loss in their individual tax return. By formal definition, a partnership is a business entity with multiple owners, who have not filed papers with the state to become a limited liability company or corporation. 

There are two basic types of partnerships: limited partnerships and general partnerships. A partnership is the most basic and cheapest co-owned business structure to establish and maintain. However, there are fundamental facts that you should acknowledge before you form or enter a partnership. 

Liability Issues Concerning Partnerships:

Personal Liability for Owners: Partners in the formation are personally liable for the entity’s debts and obligations, including all court judgments. This responsibility means that if the partnership itself cannot fulfill a payment obligation (i.e. rent, payment for supplies, loan repayments etc.) to their creditors, the individual partner(s) is personally liable to pay-off the debts. 

There are, however, a few exceptions to this personal liability characteristic. For instance, some partners may have limited personal liability if the formation is constructed as a limited partnership. The limited partnership structure places personal liability on the general partner—the individual who wholly runs the business. In this setting, the limited partners are more or less, passive investors—they will lose no more than their original investment in the partnership. Moreover, some states offer special limited liability protection. Entrepreneurs or investors concerned with personal liability issues will typically choose to incorporate their business or operate as a limited liability company.

Joint Authority Issues Concerning Partnerships:

Any individual partner in a partnership can typically bind the whole formation to another business deal or contract. For example, if a partner signs a contract with a supplier at a price the partnership cannot afford, another partners can be held personally responsible for the funds owed under the contract. There are only a few limits regarding a partner’s ability to commit the partnership to a business deal. For example, one partner cannot bind the formation to a sale for the majority of the partnership’s assets. 

The ability for a partner to maneuver and engage in a business deal is affirmed in the formation’s partnership agreement. This document places limits on the partners within the formation. In most partnership formations without a partnership agreement, the individual partners have the ability to bind each other to a business deal.  

Each individual partner can be held accountable—and subsequently sued—for the full amount of the formation’s debt obligations. If this occurs, an individual partner may be able to file a suit against the other partners for their shares of the debts. Because of this combination of personal liability with regards to debt—and the fact that each partners has the authority to bind the formation—it is critical that partners trust one another.