Benefits-Risks

Benefits
• It is easy to form a partnership. If you file a DBA (fictitious business
name statement) and obtain a business license from your city or county
government, your partnership is generally considered as having been
established. As with a sole proprietorship, if a partnership is files required
relating to legal structure.
• Partners share the responsibility of the business. Unlike sole
proprietors, partners have the advantage of being able to divide the work
load, blend skills, share ideas, and make joint decisions that will make the
business more profitable.
• Partnerships have more access to funding. Having two or more
individuals contributing money to operate the business is always helpful. In
addition, if the partners’ personal equity is significant, the partnership will
probably be more successful in attracting funding from lenders or investors.
• Partners – not the partnership – are taxed. The business itself does
not pay taxes. Distributive shares of the profits (losses) of a partnership are
reported as earnings from a business on the partners’ personal tax returns and
are computed with their other earnings and deductions at the appropriate rate.
Risks
• Dissolution of a partnership can be difficult. Although it is not
required by law, it is wise to have a formal partnership agreement spelling
out not only the contributions and responsibilities of each of the partners, but
providing for a partner to exit the partnership by buying out or selling to
other partners.
• Partners with more equity or assets stand to lose more. If the
business fails, the partners with the most equity or the most personal assets
stand to lose more.
• Profits belong to all partners according to equity share. The
business will have to make earnings sufficient to support each of the partners.
Partners must agree on when and what portion of their earnings should be
retained to operate the company and when and what portion should be
distributed as owner draws.
• Partners are bound by each other’s decisions. The nature of a
partnership is that all general partners* have a right to act on behalf of the
company. Unless spelled out otherwise in the partnership agreement, partners
can individually make contracts, spend money, borrow money, etc. and the
other partners will be bound by those decisions.