Partnerships for Online Stores ExplainedA 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. |
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Partnerships for Online Stores Explained
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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. |
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.
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.
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.
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.
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.
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.
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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