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A partnership is a legal
business entity formed by two or more owners in
which the partners work together to achieve and
share profits and losses. Yet, all owners of the
business share unlimited liability for the debts
incurred by the business as well.
A partnership is simple, inexpensive and easy to
form and maintain and can be done so by any two
people or more.
In general, there are two types of partnerships:
general partnerships and limited partnerships. In a general partnership, the partners of the
business are liable for all debts of the
business. And if the business can not pay its’
debts to a creditor, lender, landlord or
supplier, then the creditor can legally go after
any of the partners and their personal property
we well. |
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However, partners can protect themselves from
any such problems by forming the partnership as
a limited partnership where each partner has
limited personal liability.
And in this manner, only the general manager who
runs the business takes on personal liability
while the limited partners are only at risk at
losing their share in the partnership as
investors.
Often times, businesses who are concerned about
personal liability proceed to form their
business as a limited liability company (LLC)
where written and legally binding agreements are
carefully created in order to avoid risk and
loss.
For example, in circumstances where high dollar
business deals are involved, a partner can bind
the business to a contractual agreement. |
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However, a partner can not
bind the business to a sale of all that pertains
to that business without a legal agreement from
all of the partners involved. And if not
carefully handled, then a partner can bind other
partners to a business deal and hold all
partners liable and responsible as well.
If something goes wrong in a major business
deal, then a partner can be sued for the full
amount of the business debt. And then that
partner can sue the other partners for their
share of the debt as well.
And this is one of the reasons why successful
partnerships must be built upon trust and mutual
understanding right from the start.
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Filing for taxes within a partnership
In a partnership, the business is not taxed
separately from its partners (owners). Instead,
the income goes straight to the partners and is
taxed accordingly.
This becomes what is known as a pass-through
entity where the partnership does not pay any
income taxes on the profits earned.
Any income earned from the business passes
through the business and goes directly to the
partners.
Then the partners have to report their share of
the earnings on their own individual tax
returns. Furthermore, each partner must pay
estimated quarterly payments to the IRS each
year.
And although the partnership itself does not pay
taxes, it must still file an IRS Form 1065 each
year as well. The IRS Form 1065 clearly states
what each individual partner has earned from the
business which is then turned into the IRS for
review, process and approval.
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Forming a partnership
A partnership can be formed just by
agreeing to go into a partnership with another
individual. And filling out forms is not
required to establish an ordinary partnership.
However, doing so should be done for the
protection and liability of the partners
involved.
Yet local and state
requirements must be met by all partners just as
with setting up any other type of business.
When forming a
partnership, you will have to register a
fictitious business name with your state or
county clerks’ office first.
Then you can file your
partnership agreement with the Secretary of
State Department for your state.
And when it comes to forming the actual
partnership agreement, it’s always best to make
clear, (in writing) each partner’s rights,
duties and responsibilities within the
partnership.
All of this should be made clear within a
legally binding, written agreement.
It should also be noted that a partnership can
cease just as easily as it can be formed.
For example, if one partner decides to leave the
company then the partnership itself dissolves.
Yet the partners who remain become responsible
for business debts and obligations pertaining to
the business. Assets and profits of the business
are then divided amongst the remaining partners
as well.
And for this cause and other reasons, a buyout
agreement should be included in the partnership
agreement and should clearly state what happens
to business assets and profits if a partner of
the business walks out or sells their share of
the business.
And although the likelihood of such incidents
are less likely to happen when partners are
carefully selected, a written agreement for
every possible scenario should be made and
included in the partnership agreement when
forming the actual partnership.
By selecting the right partners from the start
and carefully creating a well written
partnership agreement, the partnership can work
and succeed in every area of the business and
can become very profitable as well. |
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