This entity is owned by two or more individuals. There are two types: a general partnership, where all is shared equally; and a limited partnership, where only one partner has control of its operation while the other person (or persons) contributes to and receives part of the profits. Partnerships carry a dual status as a sole proprietorship or limited liability partnership (LLP), depending on the entity’s funding and liability structure.
“This entity is ideal for anyone who wants to go into business with a family member, friend or business partner, like running a restaurant or agency together,” said Sweeney. “A partnership allows the partners to share profits and losses, and make decisions together within the business structure. Remember that you will be held liable for the decisions made, as well as those actions made by your business partner.”
The cost of a general partnership varies, but it is more expensive than a sole proprietorship, because you want an attorney to review your partnership agreement. The experience and location of the attorney can affect the price range. A general partnership must be a win-win for both sides for it to be successful.
An example of this type of business is Google. In 1995, co-founders Larry Page and Sergey Brin created a small search engine and turned it into the leading search engine globally. The co-founders first met at Stanford University while pursuing their doctorates and later left to develop a beta version of their search engine. Soon after, they raised $1 million in funding from investors, and Google began receiving thousands of visitors a day. Having a combined ownership of 16% of Google provides them with a total net worth of nearly $46 billion.
Here are some of the advantages of a business partnership:
Easy to form. Like a sole proprietorship, there is little paperwork to file. If your state requires you to operate under a fictitious name (“doing business as” or DBA), you’ll need to file a Certificate of Conducting Business as Partners and draft an Articles of Partnership agreement, both of which have additional fees. A business license is usually needed as well.
Growth potential. You’re more likely to obtain a business loan when there’s more than one owner. Bankers can consider two credit lines rather than one, which can be useful if you have a less-than-stellar credit score.
Special taxation. General partnerships must file federal tax Form 1065 and state returns, but, usually, they do not pay income tax. Both partners report their shared income or loss on their individual income tax returns. For example, if you opened a bakery with a friend and structured the business as a general partnership, you and your friend are co-owners. Each owner brings a certain level of experience and working capital to the business, which can affect each partner’s share of the business and their contribution. Let’s say you brought the most seed capital for the business; it could be decided that you retain a higher share percentage, making you the majority owner.