How to choose the right legal structure for your business and what they mean Part 3: Partnerships

In the last two parts of this series, we looked into the legal business structures of Corporations (Limited Companies) and Sole Proprietorship.  We now come to the third type of legal structure to consider when starting a business: Partnerships.

Partnerships

A partnership is essentially a proprietorship with two or more owners.  Taxation considerations are the main reason for organizing a business as a partnership rather than a corporation.  Each partner may offset his or her share of the partnership tax losses against income from other sources because income and losses of a partnership are taxed in the hands of the partners.

Partners may contribute money, property or services and unless otherwise stated in the partnership agreement, all contributions are considered equal.  In a partnership, each partner is personally liable for the full amount of the debts and liabilities of the business. Each partner shares equally in the profits and must contribute equally to sustain the losses.  Every partner is generally considered an agent of the partnership and of the other individual partners and every partner is jointly liable with the other partners for all obligations of the business incurred while a partner.

Each of the individuals is authorized to act on behalf of the company and can bind the partnership legally, unless stated otherwise in a partnership agreement.  It is sound business advice not to enter any partnership arrangement without a written agreement between the partners regarding responsibilities for financing the business, sharing the profits and losses, working in the business, specific duties and other important considerations.  Although generally partners are people, corporations or other partnerships may enter into the partnership relationship.

Advantages

Easy to establish

Minimal start-up cots

Limited regulation

The partners provide additional sources of investment capital and

The partners may have diversified management skills

Disadvantages

Possibility of conflict between the partners

Difficulty in raising external capital

Unlimited liability of the partners and

Partners are bound by the actions of other partners as all partners are considered to be agents of the business.