The nine advantages you get with a Partnership include:
1. One-size-fits-all Partnership Agreement: The Uniform Partnership Act
2. Minimal Paperwork
3. Split the Cost of Expenses
4. Teamwork Makes the Dream Work
5. Attractive to Investors (Limited Partners)
6. Greater Borrowing Capacity (Loans)
7. Simplified Taxes
8. Upgrade as you Grow
9. Add Partners to Expand Your Horizons
You know what, Partnerships are boring. Straight Up.
Come to think of it, they’re kind of like water…
Why would anyone in their right mind choose a Partnership?
Just like water is the base of life…
Your Partnership is the base of your future in business,
The cornerstone of your success…
If you use it the right way.
Laying the fundation of your future begins by first understanding the principles.
Only then will you see how to exploit them for your personal gain.
Read the rest of this article for a detailed breakdown of the advantages you NEED to know before starting a Partnership or opting for a more complicated LLC or Corporation.
If you are totally unfamiliar with Partnerships, scroll to the end and check out the Partnership Basics.
Advantages of a Partnership
1. Standardized Partnership Agreement: The UPA
The UPA (Uniform Partnership Act) is the Partnership rulebook.
The vast majority of States accept this document as a legally binding, standardized Partnership Agreement.
It covers all the essentials of Partnerships:
Rights and Responsibilities
and much more
How does the UPA help you?
Since the UPA is standardized, you know what to expect when starting your Partnership.
In contrast, the regulations surrounding Limited Liability Companies (LLCs) and Corporations come from the Federal government and the States.
Figuring out the exact requirements of these business entities can get tricky.
Expanding your LLC to multiple states is more complicated than using a Partnership.
States make special conditions to pre-existing Federal laws. States also enjoy passing completely new legislation of their own.
In an LLC, your focus switches from developing your business to finding a way to operate legally under multiple jurisdictions.
Spreading a Partnership to many states is straightforward, thanks to the UPA’s utter simplicity and limited external regulations.
What if your state doesn’t accept the UPA?
Learn about your State’s Partnership registration and operation guidelines on your State Secretary’s or Registrar’s official government website.
2. Minimal Paperwork
Why do some entrepreneurs prefer Partnerships over other businesses?
Partnerships are the most basic business entity with multiple owners.
Technically, Sole Proprietorships are simpler only because they have one owner.
Sole Proprietors don’t have registration requirements.
All it takes to be one is selling a product or service under your legal name.
The downside is you’re on your own.
In a Partnership, you work with a team.
Because more people are involved, some precautions and contractual agreements are in order.
Here is where the Partnership Agreement comes into play.
Forming a Partnership is Easy!
Forming a Partnership is much easier and way faster than the lengthy bureaucratic process of registering an LLC or Corporation.
Their special rules and regulations vary from one state to the next.
For a Partnership, you do not submit paperwork to the Federal government.
It all goes to your State and local governments.
On top of this, the paperwork hardly amounts to anything, especially compared to LLCs or Corporations.
Going with a Partnership also gets you out of paying the annual filing fees necessary to keep a Corporation or LLC registered with the state.
What is a Partnership Agreement?
Your Partnership Agreement is your Partnership’s constitution.
It is necessary to complete your state’s registration process.
Plus, it comes in handy if a legal dispute arises between any of the owners.
You have two ways to get a Partnership Agreement:
Most states accept the Uniform Partnership Act (UPA) as legally binding. If you’re cool with running a default business, you can use it the way it is. Just fill it out and submit it where applicable.
If you don’t want to use the default UPA or your State doesn’t accept it, get a customized Partnership Agreement written for your business. It works across the country.
Although you can save money writing it yourself, you can also pay a lawyer or third-party contract service to draw one up. They’ll work with you to meet your State guidelines and your business’s needs.
What’s in a Partnership Agreement?
Partnership Agreements include a lot of information. The full UPA is 272 Pages.
Most of it lays out the terms and conditions of a Partnership.
You can check it out yourself HERE.
To save you some time, here it’s critical points:
- Business name and address of operation,
- Name and addresses of the partners,
- Vision and goals of the business and its owners,
- Product or service description,
- How to run the business,
- Roles of the owners,
- Rights and responsibilities of the partners,
- The details of every partner’s initial investments and contribution expectations,
- How voting rights in the decision-making process are determined,
- The payout schedule,
- Resolving disputes between partners,
- Protocol of an owner leaving the business (quitting, retiring, or dying)
- And much more
Regardless of whether you write your own or use the default UPA, you are required to reach a unanimous agreement on the details and procedures of the Partnership.
This decision excludes any Limited Partners because they are passively involved and don’t hold influence in the Partnership.
The hardest part of forming a Partnership is getting everyone to agree.
You cannot build a collective business if a potential Partner disagrees with any part of the Partnership Agreement.
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What is a Partnership Certificate?
The only other thing you might need to file with your State Secretary’s office is a Partnership Certificate.
It gives you an operational business name and a business license so you can pay taxes.
In most states, you submit the Partnership Certificate online.
Just check your state’s government website and see if you even need a Partnership Certificate in the first place.
3. Split the Cost of Expenses
With a minimum of two people required to operate, Partnerships offer opportunities to splitting the costs of equipment and raw materials evenly between partners.
Alternatively, Sole Proprietors must pay for everything themselves.
The more partners you have, the further you can split the costs of high-ticket items.
Plus, the larger your team, the more capital is available to the business.
You can take out larger loans by sharing the debts with your partners (More on this later).
Better Products and Services = More $$$
By pairing the additional capital with the ability to split costs, you can get better equipment.
Better equipment and machinery produce higher quality products and services. High-quality items fetch higher prices.
For instance, take the Dyson vacuum cleaners.
They are way more expensive than generic vacuums.
They are well known because they manufacture some of the highest-quality vacuum cleaners.
In a Sole Proprietorship, you might only be able to afford to make the generic version.
With a Partnership, you can pool your money together and produce a better one.
4. Teamwork Makes The Dream Work
It’s cliche and overused because it’s TRUE.
Starting a business can be challenging at times.
When the company is a Partnership, you aren’t stuck doing every little thing yourself.
Instead, you and your partners support one another.
➤ PREVENT: The WORST challenges businesses encounter!
When a big project is on the table, it can be divided and delegated based on a Partner’s skills and current workload.
In a General Partnership, partners share everything, including their goals.
In this setup, managing the business is very straightforward.
Since everybody shares the same vision, making important decisions is quick and easy.
By building the partnership on a mutual understanding, you don’t get bogged down trying to convince someone one way or another.
Learn about your options and reach conclusions much faster with a cooperative group.
It’s much more complicated to agree if people aren’t friendly or not on the same page.
Two Heads are Better than One
The world is an incredible place where everyone has unique skills, talents, interests, and perspectives.
A Partnership allows you to collaborate with a diverse group of professionals.
As you know, some people are good with numbers while others like brainstorming ideas.
Some people even enjoy turning ideas into physical products.
Meanwhile, some prefer organizing and managing a team. The list goes on and on, but you get the point.
By balancing everyone’s strengths and weaknesses with the right skillsets, you increase your likelihood of effectively turning your dream into a reality.
Isn’t that what you want?
5. Attractive to Investors (Limited Partners)
You can take on Limited Partners as a source of funding for your endeavor.
Since Limited Partners are only passively involved in the Partnership, they receive limited liability protection.
Here are the two attractive incentives for potential investors:
Limited Partners can’t lose more than their initial investment because they receive personal liability protection.
There is no limit on the potential profits they can make from the deal.
The only thing which might cause a Limited Partner to hesitate is the long-term potential of your Partnership.
Your business’s potential depends on many variables:
- What product/service do you provide,
- The experience of the General Partners,
- Your business’s location,
- And more
In addition to splitting the costs between General Partners and receiving investments from Limited Partners, Partnerships offer a third monetary advantage:
6. Greater Borrowing Capacity (Loans)
Partnerships have an easier time raising capital for their business because partners apply for loans on an individual basis.
More people means more pockets, so when multiple partners are involved, you’re simply able to take out more loans.
Individual partners also get better terms and rates than Corporations.
Not only is the whole process easy, but partners can take out larger loans than you could with other entities.
If you have two partners with similar credit scores, you can raise more than two times as much for your Partnership as you could if you were Sole Proprietors.
Why Do Partnerships Get Special Treatment from Banks?
Partnerships are considered low risk compared to Corporations.
Here’s the low down:
Owners of complex business entities receive limited liability protection. Partnerships don’t have any.
When you take a loan for your Partnership, you guarantee payment to the lender with the Partnership’s property and assets.
Remember, the Partnership’s belongings include every partner’s personal property (including your own).
If the loan remains unpaid, banks can take your business, personal property, and the personal property of all partners.
On the contrary, banks only take the Corporation if it doesn’t pay the loan back.
They can’t touch personal property.
Even though banks are more willing to lend more to partners, the State regulates Partnership loans.
The exact terms differ from one to the next.
7. Simplified Taxes and Payment Process
Due to their simplicity, Partnerships share a few characteristics with Sole Proprietorships and Limited Liability Companies (LLCs).
All three of these entities pay taxes using the Pass-Through Process.
It is by far the most efficient way for businesses to pay taxes.
What is the Pass-Through Process?
The Partnership’s profits are distributed equally among Partners (unless otherwise specified in your Partnership Agreement).
The business’s taxes are passed along with the profits directly to the owners.
Once everybody gets paid, owners are personally responsible for paying their share of the business’s taxes.
All you have to do is keep track of how much you made as a Partner and include this in your personal income tax filings.
It’s much easier than the protocols and maintenance of Corporations and Specialty LLCs (S- and C-Corps).
Custom Payout Arrangements
As we already briefly mentioned earlier, you can create a custom system of distributing your business profits in your Partnership Agreement.
For example, you could give 25% to a Limited Partner investor and then give 15% to 5 partners (including yourself).
Regardless of how you arrange the payments, partners are all responsible for paying taxes on their portion of profits.
How Do Partners Pay Taxes?
Afterward, the company collects copies of every partner’s completed K-1.
After verifying them, the Partnership attaches all of these copies to a completed 1065 Partnership Form.
This form allows the business and the government to track what’s happening. Click here for more info on the 1065 Form.
Next, the Partnership submits the whole thing (the 1065 plus the K-1 copies) to the IRS on behalf of the partners.
Then, after figuring out how much everybody makes, every partner pays their share of the Partnership’s taxes.
Use your K-1 to complete your personal 1040 Income Tax Form.
You are probably already familiar with this form.
If you are not, here is everything you need to know about the 1040 Form.
Lastly, calculate and pay your Self-Employment Tax using the 1040-SE Form.
As a partial owner of a profitable business, your Partnership’s profits are subject to Self-Employment Tax, a combination of Social Security and Medicare Taxes.
Unless you are subject to additional excise taxes, you’re all set once you submit these forms and pay the amounts calculated therein. Click here for a list of relevant taxes.
What are the Tax Advantages of a Partnership?
1. Splitting Income
In addition to their simplicity, Partnerships can split the income of partners.
You declare a portion of the Partner’s salary as business expenses (before calculating profits).
The remainder is paid-out as distributions from the profits (after calculating profits).
2. Avoiding Double Taxation
Partners pay taxes once by using the Pass-Through Process.
Corporations, unfortunately, pay taxes twice through a process known as Double Taxation.
Initially, Corporate profits undergo Federal and State Corporate Taxes.
Then, Shareholders (Owners) pay income tax on the remainder of profits which become their salaries.
To make Double Taxation worthwhile, Corporations offer Shareholders tax benefits and liability protections.
Partners are taxed once but miss out on tax benefits and liability protection.
Many entrepreneurs begin with a Partnership.
You get the essentials required to share a successful business with multiple people.
Over time your Partnership will hopefully grow and expand its operations.
At some point, you may even need to hire more employees or secure additional funding.
As your business grows, you can simply upgrade to a different business entity with just the characteristics to fit your needs.
By upgrading, you receive limited liability protections and special tax exemptions, all while retaining the ability to have multiple owners.
There is no pressure to upgrade your business either.
In today’s world, plenty of large, highly successful Partnerships exist.
Understand, upgrading to an LLC or Corporation is always on the table if a Partnership isn’t cutting it.
9. Ability to Add Partners
The last Partnership advantage on our list is the ability to share ownership of the Partnership with high-performing employees.
In other words, you have the option to promote employees to partners.
You’re allowing them to rise to the occasion, not being defined by their position as a mere employee.
Opportunity for growth is a great incentive to get professionals to want to work for you.
The procedure for promoting an employee to become a Partner is in your Partnership Agreement.
Is a Partnership Right for You?
Partnerships are the simplest way to have a team come together to share the profits and responsibilities of running a business.
The downside of this simplicity is a lack of tax benefits, self-employment taxes, and total personal liability for you and your fellow partners.
As you’ve seen, many variables are involved in choosing your business entity and organizing it in the best way for your business, your interests, and the interests of your fellow partners.
You must gather your team and speak with lawyers and business professionals about your plans.
They know what businesses face and what makes (or breaks) a successful operation.
Since some states can have unique laws for business partnerships, it’s also a good idea to seek out local experts.
Partnerships came into existence with the release of the Uniform Partnership Act (UPA) of 1914.
Our article overs the advantages of a typical Partnership according to the most recent version of the UPA (1997 - Updated 2013).
By forming a Partnership, you and at least one other person own and operate the business together, sharing its profits, losses, and assets.
If you are the only owner or the company is a Non-Profit, it is not a Partnership by definition.
Even though Partnerships can own property, they are not stand-alone entities.
Their entire existence is dependent on the active involvement of the Partners. Without Partners, there is no Partnership.
The 3 Types of Partnerships
The three classifications of Partnerships to choose from are:
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships (LLPs)
The best setup depends on your business’s size, structure, and goals.
For your sake, this article only discusses General and Limited Partnerships.
LLPs are less common and much more nuanced. A deeper analysis of LLPs extends beyond the focus of this article.
General Partners are actively involved in the day-to-day operation and management of the Partnership.
Unless your Partnership Agreement says otherwise, the control, management, and responsibility are divided equally between the Partners.
If someone files a lawsuit against your Partnership or banks want their money back, they come after your personal property.
General Partners share all aspects of the business, including liability. You must include everyone in the decisions which may affect the Partnership’s future integrity.
In addition to being responsible for the business itself, General Partners are also responsible for each other.
If a General Partner makes a significant business decision on their own, everyone is responsible for whatever happens.
It doesn’t matter if they inform the rest of the team.
Limited Partners are passively involved in the Partnership.
More often than not, Limited Partners invest in your business in exchange for a cut of your profits.
They have no voting rights or influence in the decision-making process.
Limited Partners aren’t personally responsible for the Partnership.
They leave the business to those responsible: General Partners.
Without any influence in the company, Limited Partners are only liable to lose their investment.
They have special personal property protection if courts or banks bring claims against the Partnership.
Remember, you don’t need Limited Partners to start your Partnership.
You can all fund the business yourselves as General Partners.
Why Choose a Partnership?
Entrepreneurs choose Partnerships for three main reasons:
- It’s the simplest business entity with multiple owners
- You can collaborate with people who have complementary skillsets
- You share the cost and responsibility of starting and operating a successful business
Forming a Partnership requires almost no paperwork.
Even though verbal agreements are sufficient, having a custom Partnership Agreement written up is preferred.
This legally binding document makes your Partnership official.
You can use your Partnership Agreement as a reference should a dispute arise between Partners.
Partnerships work best with relatively small groups of people where Partners provide unique skills and interests.
It’s why Partnerships have a higher success rate.
**It’s obvious: **
When multiple people focus their talents and unique perspectives on a common goal, whatever they produce will be of such a higher caliber than if those same people each tried making the same thing on their own.
Share Important Aspects of the Company
In a Partnership, you divide:
- Cost of doing business,
- Profits (and losses).
Before making any final decisions, whether a Limited or General Partnership (or a completely different business entity), make sure you understand the pros and cons of your options.
Otherwise, how will you know if it aligns with your personal and business goals?