Most states have adopted the “Uniform Partnership Act,” and according to this act, a partnership is an “association of two or more persons to carry on as co-owners of a business for profit.” It’s important to choose the right partner to complement your skill set and expertise so the business can flourish. There is unlimited liability for partners, just like with a sole proprietorship, but one difference is that you can share the responsibility i.e. make decisions together and both can invest their own money.
There are different types of partnerships, for example, there are general partners who split the managing, financing, and liability tasks. There are also those who don’t play an active role in managing the business, known as limited partners. Their liability is limited to their investment. Partnerships don’t necessarily have to be equal: choose the right one for your business.
A partnership is also easy to establish since there isn’t a waiting period and no formal paperwork to fill out. It’s recommended to draw up an “Articles of Partnership” agreement, which specifies what each person’s role is in the company.
There is stronger growth potential in this business structure, since the more people you are, the more likely you are to be approved for a loan, as banks favor partnerships more than sole proprietorships. Although it is not required to pay federal income tax, a partnership is required to file Form 1065, U.S. Return of Partnership Income, to report its income and loss to the IRS Form 1065. This is because each person declares the income on their own personal income tax return. The downside, however, is that both people are responsible for any debt the business may incur.
If one of the partners dies, the business will have to be closed, since it can only operate with both parties. Another disadvantage is that the partnerships can make decisions independently of one another, meaning one person could commit to something that the other isn’t on board with.