There must be two or more individuals to form a partnership. A partnership can be entered into intentionally; however, individuals do not need to consider themselves a partnership to be one. They do not have to have a written partnership agreement to be a partnership; two or more people acting like partners are sufficient – if they act like a partnership, courts will treat them as a partnership. Under various state laws, individuals act like a partnership if they “carry on as co-owners a business for profit.” For example, if someone is receiving a share of the profits from the business, that is evidence that he or she is a partner, unless the payment was for a debt owed, wages, or loan interest. Additionally, if multiple people have control over business decisions, they are likely acting as partners.Advantages of a Partnership
- Like a sole proprietorship, partnerships do not pay tax at the corporate level. Taxes are paid only at the individual level. Specifically, partners must pay tax on their share of the partnership’s earnings by filing a Schedule K-1 along with their individual income tax return.
- Just as with a sole proprietorship, there are few required formalities when operating one’s business as a partnership, which makes a partnership an easy and inexpensive way to do business.
- Many of a general partnership’s default features can be modified through the partnership contract. As a result, partnerships can be made to reflect many kinds of business relationships and structures. If two or more people decide to enter a partnership, they should ensure that their rights are protected by putting them in writing in a partnership agreement. Consumers should consider hiring a lawyer to assist them in the preparation of such an agreement.
Disadvantages of a Partnership
- Whereas someone may have sole control and decision-making authority with a sole proprietorship, in a partnership every partner must share control and decision-making authority with other partner(s).
- One partner’s actions and agreements can bind the other partner(s). For example, if a partner promises another company on behalf of the partnership to buy some equipment for $2000, even if he did not consult the other partner beforehand, the partnership can be held liable for the promise of the individual partner.
- In a general partnership, each partner is personally liable for the debts of the partnership. Like a sole proprietorship, this form of organization puts no limitation on a partner’s personal liability.
- A partner’s general interest in a partnership is not transferable. A partner may only transfer his or her interest in the earnings of the partnership. This means that a partner may transfer his or her rights to the profits and losses of the partnership, but after the transfer the partner remains a partner and the transferee does not become a partner. The transferee has no right to share in the control of the partnership and the partner is still personally liable for the debts of the partnership. This is because people are not required to share control of a partnership with people with whom they did not at some point agree to be partners or act as partners. If at some point a partner wants to exit a partnership, has found a willing and able buyer, and other partner(s) would agree to such an exit, the partner should consult a lawyer regarding the structure of any potential sale.
- Like sole proprietorships, general partnerships are not very long-lived, since the partnership automatically dissolves upon the death, disability, or withdrawal of a partner.
