A Simple Guide to Partnership Business Structure

Is partnership business structure good for startups or small businesses? Find here everything about Partnership Business in simple ways.

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Do you want to make your business successful at a minimum cost? Then a partnership business structure is the best choice for you. The flexibility, simplicity, resources, and expertise a partnership offers you that no other business structure could. 

A successful partnership can help a business thrive in a very short time. But you could need help choosing a partnership structure and forming your partnership business, which you don’t need to worry about. We are here at your service and will guide you through the full partnership process.

What Is Business Structure?

A legal business structure defines a business entity legally formed in the business market. It decides how a business is operated, managed, and owned. 

In a word, the business structure is the skeleton of a business company. The ownership distribution, everyone’s roles and responsibilities, management system, taxation process, and every aspect of a business are determined by following a business structure. And that’s why business structures bring ease to companies.

Types of Company Business Structure

You know that a business structure is the first requirement for every company. But to choose a suitable legal structure, you should know about business structure types.

Types of Company Business Structure

What Is Partnership Business Structure?

Put simply, a partnership business structure is a legal business where two or more people form and run a business together. 

In partnership, partners make a business agreement – which outlines the terms and conditions of the business. The agreement specifies how the partners invest money in the business, how the company is managed and operated, how ownership is distributed among partners, etc.

Partnership Business Structure Example

Most people form partnerships among family members or friends. In some cases, people involve other trustworthy people because of the chance of betrayal in partnership. 

Imagine you and your other two friends decide to form a business where you divide business responsibilities among friends. To have a clear concept, you make an agreement that includes several factors like ownership structure, management, decision-making, distribution of profits and losses, etc. With your friends (business partners), you should have strong trust, communication, and work flexibility. Otherwise, your business can flop. 

We all know about the tech giant Google. But do you know that at first, it was a partnership business? Two friends, Larry Page, and Sergey Brin, founded Google as a partnership while they were students. Later, it becomes a corporation as it grows into a multinational company.

Characteristics of Partnership

Before starting a partnership, people should understand the characteristics of a partnership. If you acknowledge the characteristics carefully, you can make a clear and perfect partnership venture. Here are some characteristics of a partnership:

  • Number Of Partners: To create a partnership business, at least two people should be involved. A maximum of 20 people can form a partnership.

  • Agreement: In a partnership, it’s mandatory to make an agreement to reduce the chance of betrayal between partners. The agreement can be oral or written. But making a written agreement with every partner’s consent and signature is better. The partnership agreement specifies each partner’s duties and rights.

  • Decision-making: In a partnership, every partner has to agree to any decision. Even if only one partner disagrees, the decision won’t be granted.

  • Fiduciary Duties: Fiduciary duties are the legal obligations that partners have towards each other and the partnership itself – like loyalty, faith, confidentiality, etc. In a partnership, aligning fiduciary duties is important.

  • Learn Partnership Types: Partnerships have different kinds. It’s important to know about them.

  • Taxation: Partnership business structures follow pass-through taxation. Each partner pays their individual tax rate on their share of the partnership’s profit. 

  • Shares of Profit and Loss: In a partnership, the profits and losses are shared among the partners based on the agreement. 

  • Contingent Liability: You must be aware that partnerships have unlimited liability. This means partners are personally liable for the debts and obligations of the partnership. 

  • Dissolution: Partnerships have a limited life span; you should know that. If a partner withdraws or dies, the partnership could be broken, and the business could dissolve.

Describe Types of Partnership

Do you want to start a partnership? Then you should know about the partnership types. After knowing the types, you can easily decide which type of partnership you want. 

There are several types of partnerships. However, we listed the most established partnership, which provides the most benefits.

General Partnership: 

  • A general partnership happens when all partners share equal legal and financial liabilities. 

  • It has the simplest structure. 

  • All partners share equal responsibility for management, profits, and losses.

  • Each partner is personally liable for all the partnership’s debts and liabilities.

Limited Partnership (LP):

  • A limited partnership happens when one general partner and one or more limited partners form a partnership.

  • It is a more formal business structure than a general partnership.

  • The general partner has unlimited personal liability and responsibility in a limited partnership.

  • The limited partners have limited liability and only contribute capital to the partnership.

Limited Liability Partnership (LLP):

  • A limited liability partnership is a combination of a partnership and a corporation.

     
  • In an LLP, partners have limited liability.

  • It protects the partner’s assets and has the flexibility of a work agreement.

  • LLPs are a common structure for accountants, lawyers, and architects.

Joint Venture:

  • A joint venture happens when two or more people collaborate on a specific project. 

  • A joint venture is started to achieve a specific goal.

  • Each partner has to contribute resources, expertise, or capital.

  • Each party shares profits, losses, and management responsibilities based on the agreement.

Who Should Form a Partnership?

You know that a partnership is less complex, less costly, and less risky. As a matter of course, several types of business owners and businesses are highly interested in forming a partnership. A partnership can be profitable for –

  • Entrepreneurs and Small Business Owners – because it is less costly and easy to maintain.

  • Certain professionals – such as lawyers, accountants, doctors, or architects—benefit from liability protection from an LLP. 

  • Family Members -because of trust and combined capital, family members or friends are often involved in partnerships.

  • Global venture – people from different countries collaborate in a partnership to achieve a business goal or project.

How Can You Form a Partnership?

A partnership business would be profitable, but do you know how to form one? If not, then stay tuned. We will give you the exact steps for starting a partnership business. 

  1. Choose Your Partners: It’s the first task you must do to start a partnership. Find your most trustworthy and potential partners with the same business vision and goal. The right business partners can take the business to a higher level. 

  2. Determine the Partnership Type: We already established that partnerships have different kinds, like LP, LLP, LLLP, etc. Choose one type of partnership according to your convenience. 

  3. Pick a Business Name: A business name is essential for every business. To register your business, you must choose a unique business name. Also, a short, memorable, and easy-to-spell business name can attract your target audience.

  4. Create a Partnership Agreement: Although some people make a verbal agreement, it can be breakable sometimes. That’s why business experts recommend a written agreement in partnership business. An agreement is a legal document listing some facts- terms, conditions, business operations, partner’s responsibilities, profit and loss sharing, and dissolution decision.

  5. Register Your Business: Register with the state government to start your business. Every state or country has different rules. Follow the instructions properly and pay the fees to complete the business registration. 

  6. Obtain Employer Identification Number (EIN): EIN is necessary for hiring employees, opening business accounts, applying for licenses, etc. If you plan to start a partnership in the US, you should get an EIN.

  7. Obtain Permits and Licenses: You may need several licenses and permits to run your partnership business. These permits are required according to state rules. 

  8. Open a Banking Account: Every type of business requires a business bank account. Separating your business finances is necessary.

  9. Comply with State Regulations: To continue your business without any hassle, it’s mandatory to comply with state laws, including taxation, annual report filing, etc. 
How can you form a partnership?

Partnership Business Advantages

If you are going to choose a partnership business structure, it’s essential to understand the benefits. Understanding the benefits can help you utilize those business benefits in your company. Here are those:

  • Easy Setup: Setting up a partnership is easy because it requires less paperwork. With the state government, you can quickly start a partnership with fewer regulations. 

  • Shared Resources: In a partnership, it is easy to raise money, investors, product resources, etc. – because of the partner’s participation. Also, different partners share their diverse knowledge, experience, connections, and expertise. 

  • Raising Capital: If you have multiple partners, it would be easy to collect the capital in the early stages. Also, if you face business losses, you can easily cope with them because partners can cover them.  

  • Shared Responsibility: Sharing responsibility among partners is the best benefit of partnerships. They have equal authority in decision-making. Also, partners can help each other by sharing responsibilities. 

  • Shared Finance: It’s easy to raise capital in partnerships because of multiple partners. Also, having a business partner can reduce the burden of finances.   

  • Low Costs: A partnership is not only low-cost to set up but also easy and inexpensive to maintain. For small businesses, it is a great chance to establish themselves.

  • Flexibility: Running a partnership business is flexible. Because it follows fewer formalities, and the management is also flexible.

  • Liability Protection: Although partnerships don’t allow liability protection, LPs and LLPs offer asset protection under some conditions.

  • Simple Taxation:  Partnerships follow pass-through taxation. This means they can avoid double taxation hassles. In partnership, you don’t have to follow many state instructions. 

  • Getting Loans: It’s easy to get a loan in a partnership because of multiple partnerships. If you have many potential partners, you could easily apply for a loan.

Some Drawbacks You Should Consider

Knowing the drawbacks of a partnership structure can be helpful for you. You can be careful about those disadvantages and save your business from losses. 

  • Limited Liability: You must agree that a partnership is risky for securing owners’ personal assets. So be aware of that before forming a partnership.

  • Business Losses: Like full business profits, partners bear total business losses because of the pass-through taxation system. Also, each partner is personally liable for the business’s debts.

  • Less Security: Partnerships are flexible for partner unity. However, the partnership is not secured because partners can betray you. 

  • Conflicts: In a partnership, partners have equal rights in decision-making. And this can create a bigger chance of disagreements. 

  • Dissolution:  Partnerships are breakable because the company will automatically dissolve when a partner leaves or dies. As usual, ending partnerships is also a complex process. To avoid these conflicts, make a clear and concise agreement. 

Get Help

Don’t be upset about the drawbacks. The good news is that proper consulting can easily solve these problems. Some famous business consultants and service providers, like Business Globalizer, form hassle-free partnerships. Also, they can support you with all the necessary services, including EIN, bank account opening, tax filing, etc.

FAQs on Partnership Business Structure

Q1: Does partnership benefit US non-residents?

A: Yes. Partnerships in the US can bring several benefits for establishing your business, including market diversity, unlimited resources, etc. It is a great idea for people who want to expand their businesses globally. But this is a complex and lengthy process. In this case, you can get help from a business consulting agency. 

Q2: What is the most common business partnership structure in the US?

A: A general partnership is the most common partnership in the US. Business owners also often form limited partnerships. 

Q3: How does one pay taxes in partnership? 

A: Tax filing is simple in partnership business. It has fewer formalities than filing a tax form. To submit your annual filing in partnership, you should file IRS Form 1065. 

Q4: Is partnership a good idea for start-ups or small businesses?

A: Yes, obviously. The partnership benefits small businesses and startups by offering less complexity and more advantages. 

Bottom Line

When you are excited to grow your business, don’t wait and accept the partnership business structure. If you plan a successful partnership, it could flood your business with success. Plus, it could bring a lot of business opportunities. Don’t miss the chance!

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