Choosing an Entity : General Partnership
If you have more than one person owning your business, you can choose to form a partnership.
Partnerships can be informal but that’s not usually a good idea. Especially if your partner is a friend or relative — I’ve seen so many of these go bust that I can tell you definitively that you must have a partnership agreement that covers such things as compensation, time commitments of the partners, how you will divide profits and losses, how capital contributions will be made and by whom, as well as, most importantly of all, how one gets out of the partnership and what happens when that occurs. A sample of a partnership agreement can be found here, as well as many other places on the web. Be sure to consult a legal professional and a tax professional before you sign any partnership agreement.
Partnerships file Form 1065 for Federal tax purposes. The question often comes up as to whether a husband-and-wife partnership needs to file Form 1065; according to the IRS, the answer is yes — although there is some question as to whether, in community property states, the couple could just split the partnership return numbers down the middle and report two Schedule C’s with Form 1040.
When you file a Form 1065, you will also take the results of that form, and issue Form K-1 to each of the partners. This will include such information as the partners’ share of income or loss, depreciation, Section 179 “instant” depreciation, and other information which is then used by each partner on Schedule E of their personal Form 1040s.
While partnerships are not liable for income taxes, they do pass along their income or loss to the partners on Form K1 — so that we avoid the “double taxation” inherent in a C-Corporation (see the post on C Corps once we release it).
Advantages of Partnerships
1. Not subject to income taxation. As mentioned above, profits and losses are allocated to the partners for reporting on their own individual tax returns via Schedule E.
2. Simple to set up — All you basically need in most jurisdictions is to file a ficticious name statement or the equivelent with the local authorities. It is very advisable, however, to have a thorough partnership agreement signed by all the partners — althoug this doesn’t have to necessarily be filed with any government agency.
Disadvantages
1. Does not convey liability protection to the owners. A general partnership has general liability. Each of the partners is responsible for the debts, actions, and other liabilities of the partnership. Some of this can be mitigated by correct insurance, but the bottom line is, there’s no “line of defence” of the sort that limited liability companies or corporations have.
2. In the absence of a good partnership agreement, it can be difficult to get out (or get someone out) of a partnership.
3. As in item 1., the business actions of any partner bind all the partners. So you’d better be very sure that you’re going to like the decisions of your partners, or have agreements in place to handle such problems that might come up. Any partner can bind the partnership to contracts, or the ramifications of their actions regarding the business.
Generally, it’s our opinion that other than the case of a married couple, general partnerships aren’t going to be the way to go for bloggers or web commerce businesses. If you have more than one owner who are not married, you will want to consider either a limited liability company (LLC) or a corporation.
Tags: 1065, blogger taxes, choosing an entity, general partnership