Deciding on a legal business structure is the first step when starting a new company worldwide. The decision impacts everything—from how you report your source of income and your level of liability to adherence to different legal obligations at all governmental levels. 

For many people, forming a business partnership is a strategic move. Such partnerships can synergize resources and expertise to create a collective capability. A partnership is unlike an LLC (limited liability company) and implies that the individuals who share the management and profits come together to manage the business. So, what exactly is a business partnership? This guide will help you with the details.

What is a Business Partnership?

A business partnership is a type of business structure where two or more individuals share responsibility for managing and operating a particular business to increase the chances of its success.

Each partner contributes resources, skills, or capital to the specific venture in a partnership. Moreover, they also share the business's risks, losses, profits, and responsibilities. These business partners can be individuals, companies, partnerships, or a combination of all three.

A business partnership requires the management and the decision-makers from companies to work together for the success of a business. 

Features of Business Partnership 

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Now, the features of a business partnership include:

• Formation of Partnership: A business agreement is usually made between partners, which involves clauses requiring the mutual sharing of profits and losses for businesses equally.
• Number of Partners: A partnership must be manifested between two or more people who often share a similar business purpose. 
• Risk Bearing Capability: The partners share the risks of operating a particular business firm as a team.
• Decision-Making and Control: Every business partner can participate in the organization’s management and decision-making processes. 

Types of Business Partnerships

There are three major business partnership types worldwide: general, limited, and limited liability. Interested individuals need to distinguish the differences between these partnerships. Let's look at how these partnerships are different from one another: 

1. General Partnership 

If you are wondering what a general partnership is, it is one of the common forms of business partnership in which each partner is actively involved in day-to-day operations. These people also participate in the decision-making of the specific business and share equal responsibility for the associated losses, profits, or debts. 

2. Limited Partnership 

There are usually two types of partners in a limited partnership: general and limited. The general partner oversees the day-to-day running of the particular business and assumes full personal liability for the specific partnership's debts. 

In contrast, the limited partner never takes responsibility for the company's management. This person will receive only their share of the profits once the general partner has received their share.

3. Limited Liability Partnership (LLP)

It often combines the flexibility of a general partnership with the specific limited liability of any limited company. Each partner participates actively in the business's day-to-day operations in a limited liability partnership. However, these people are not personally liable for the specific LLP's debts and liabilities. The latter often goes beyond their capital contribution and have their assets protected.

4. Limited Liability Limited Partnership (LLLP)

A Limited Liability Limited Partnership (LLLP) is a form of legal business entity that combines the elements of a limited partnership (LP) and a limited liability partnership (LLP). It provides limited liability to all its partners, meaning that their personal assets are generally protected from the debts and liabilities of the partnership, while still allowing for the partnership to have one or more general partners with unlimited liability, who manage the business, and one or more limited partners, who are typically investors with no role in the management and limited liability.

Benefits of Forming Business Partnerships

Starting your business journey with a partner is always about combining different strengths, sharing responsibilities, and multiplying all resources. This is what a business partnership is all about! It is a combination that helps create a resilient, resourceful, and successful venture. Here are the tangible benefits for individuals when choosing a business partnership structure:

1. Shared Responsibility

Business partnerships often result in shared responsibility to help lessen individual workloads. For example, a partner adept in digital marketing can focus on online promotions, while the other, skilled in operations, can manage order fulfillment. 

2. Diverse Skill Set

Partners often have varied skills and expertise, which help enhance the business’s capabilities. For instance, one of the partners could focus on website design and UX design while the other manages customer service and content creation. 

3. Enhanced Creativity

Partnerships often promote enhanced creativity and innovation. These collaborations can help you develop the best business ideas with more minds in work. For instance, an online design store can have one business partner create unique designs while the others showcase the same designs innovatively on the platform. 

4. Risk Mitigation

Business partnerships always mean risks are always shared between two or more people. For example, if an eCommerce platform fails to perform as expected, both partners will share the financial burden.

5. More Resources

Partnerships often mean access to more resources. Examples include capital, different clientele, and even industry contacts. For example, one of the partners in an IT firm might bring in financial investments while the other brings in a rich client database.

6. Networking Opportunities

More partners equate to a wider network. This advantage can always be leveraged for business growth. For instance, an online advertising agency can benefit from a business partner’s digital influencer contacts. The same business can utilize the other person’s connection with ad platforms for more collaborations. 

7. Improved Decision-Making

Different perspectives lead to well-rounded decision-making in business partnerships. For example, partners with respective expertise in editorial and technical fields can balance a digital magazine's decisions. 

8. Flexibility

Partnerships often provide flexibility in operations and business management. For example, the partners of an eLearning platform can alternately manage course updates and student interactions. This often ensures continual operation, even during vacations. 

9. Tax Benefits

Business partnerships can offer various tax benefits, depending on the particular jurisdiction. An online consultancy may always benefit from tax deductions available for business partnerships in its operational domain. 

10. Easier to Form

Forming a business partnership can often be less complex. This is because collaboration requires fewer formalities, paperwork, and expenses. For instance, two freelancers might combine their services and form a partnership firm with minimal documentation. 

How to Start a Business Partnership?

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Starting a business partnership is not everyone’s cup of tea. However, with expertise, effort, and dedication, interested individuals can follow this step-by-step procedure:

Starting a business partnership is not everyone’s cup of tea. However, with expertise, effort, and dedication, interested individuals can follow this step-by-step procedure:

1. Choose a Particular Business Name.

Your partnership business name should always include your brand. You must also obey the laws of your country. The name should be unique and clear. That should never mean you are a government agency or a non-government agency.

You can try brainstorming some possible names to ensure consistency with your brand’s message—always check your name to confirm that no other business is accredited in your state.

2. Draft a Business Partnership Agreement.

This important document often outlines how your specific partnership will function. A partnership agreement can prevent future disputes even though it is not required in several jurisdictions.  

Try to hire an experienced business attorney to draft the agreement if needed. This document should cover the following topics at a minimum:

• The distribution of profits and losses,
• The roles and responsibilities of each partner,
• The procedures for adding or removing partners,
• The procedures for dispute resolution,
• The protocol in the event of dissolution of the partnership.

3. Register Your Business Partnership.

Your business partnership must always be registered with the appropriate state agency to avoid legal complexities in the future. 

You can always check with a legal advisor for the specifics in your particular area. You must file a document known as a “Statement of Partnership Authority” in most cases. This specific document generally includes several details about your business name, duration of the partnership, purpose, and information about each partner.

4. Obtain an EIN.

An Employer Identification Number (EIN) is the Social Security Number of your business partnership. The IRS often uses it to track your respective business’s tax obligations. An EIN is usually necessary even if your organization does not have employees. You can apply for an EIN through the official IRS website, which is free and straightforward. 

5. Open a Business Bank Account.

A separate business bank account always helps you keep the business finances separate from your personal finances. This also makes tax time much easier and lends credibility to your partnership business.

When choosing an account, choose a bank that caters to small businesses. You might require some documents, so be prepared to provide your business partnership agreement, EIN, and other important business registration documents.

6. Register to do Business in Other States.

You will likely need to register your business outside states if your partnership will do business in places other than where you registered. Each state has strict rules regarding what constitutes “doing business” in their jurisdiction. Consult with a legal advisor or lawyer again to understand whether this step is necessary. 

7. Obtain Necessary Permits and Licenses.

Your partnership may need specific business licenses or permits to operate legally depending on your industry and location. Research all federal, state, and local requirements to apply for your necessary permits and business licenses. You can also use the US Small Business Administration’s license and permits tool to ease the process. 

Legal and Tax Implications of a Business Partnership

While entering a business partnership can offer numerous benefits, you must also understand the legal and tax implications before starting this venture. 

Legal Implications

Here are some legal implications to consider before venturing into a business partnership:

• Formation

You must always make sure to establish a formal business partnership agreement. This document outlines ownership structure, profit and loss sharing, and decision-making procedures. It may also include conflict resolution methods and exit strategies. Consulting a lawyer to create a legal and comprehensive agreement is essential.

• Liability

All partners share unlimited personal liability for the business's debts and obligations. This means creditors can come after the personal assets of individual partners if the partnership cannot fulfill its financial obligations. Limited and limited liability partnerships (LLPs) offer some protection against personal liability but come with other complexities.

• Management

The business partnership agreement determines how decisions will be made. It also assigns each partner roles and responsibilities based on the rules. Having proper guidelines helps avoid future conflicts and ensures smooth business operations.

• Taxes

Partnerships are considered pass-through entities. This means the particular business itself doesn't pay income tax. Each partner reports their share of the partnership's profits or losses on their tax return. It is usually regardless of whether the profits are withdrawn.

Tax Implications

The tax implications to consider before entering a business partnership include: 

• Partnership Return

The partnership must file an annual information return (Form 1065) with the IRS. The aim is to report its income, deductions, credits, etc., regardless of whether the business earned a profit.

• Self-Employment Taxes

Partners are considered self-employed and are responsible for paying self-employment taxes (file Schedule SE or Form 1040/1040-SR). This often includes paying their Social Security, Medicare, and regular income taxes.

• Estimated Tax Payments

As self-employed individuals, partners must make estimated tax payments throughout the year.

Final Thoughts on a Business Partnership

Two or more people come together in a business partnership worldwide. This collaboration involves sharing responsibilities, risks, profits, losses, and other related factors. The best thing about business partnerships is that they involve people with different perspectives and skills who can contribute to the betterment of a particular company. 

However, anyone involved in such partnerships should be aware of legal tax implications to avoid issues in the future. The best thing to do here is to contact an employment lawyer handling such matters. A professional can help negotiate an agreement between partners in a particular business so that they can continue their partnership without disagreements or legal complications.

FAQs

1. How is a business partnership formed?

A partnership is usually formed through a proper business agreement. This contract outlines all partners' terms, responsibilities, and profit-sharing abilities. The agreement is not mandatory by law but is essential to avoid future disputes. 

2. What are the main types of business partnerships?

There are three different types of partnerships: general partnerships, limited partnerships, and limited liability partnerships. Each category differs in terms of liability and management structure. A business might choose a type based on its financial, legal needs, and operational objectives.

3. Are partners personally liable for business debts and obligations?

In general partnerships, partners are usually personally liable for business debts and obligations. However, partners can limit their liability to the amount they have invested in the business in limited and limited liability partnerships. 

4. How are business partnerships taxed?

Business partnerships are not subject to income tax. Instead, their respective profits are passed to the business partners, who often report the business income or loss on their tax returns. Each partner's share of profits and losses is reported to the IRS.

5. How does a business partnership agreement protect the partners?

The partnership agreement provides provisions for distributing each employee’s contributions, profits, and losses. It also involves the rules for resolving disputes, adding or changing partners, and even dissolving the partnership. It always offers solutions and predetermined courses of action for various scenarios.