What is a Partnership?
A partnership is a legal arrangement between two or more people or companies who want to establish a business together.
Forming a partnership means sharing not only ownership and profits but also the responsibilities and risks that come with putting up a business together.
While partnerships take many forms, they all involve two or more people or companies contributing capital, labor, skills, and experience.
Unlike other business types, partners are personally liable for any business debts of the partnership, putting the partners’ assets at risk. However, forming a partnership is one of the easiest business types to form.
General Partnership vs LLC and Other Business Structures
Each partnership type comes with its own advantages and disadvantages. Below is a simple breakdown of all the business types and what you can expect from each:
- General Partnership: This is often sought out because of its advantages, such as ease of formation, pass-through tax treatment, and simple tax reporting. On the other hand, its disadvantages include personal liability, lack of continuity, and lack of investment flexibility.
- Limited Partnership: This type comprises two participants: general partners and limited partners. While general partners handle the business, limited partners invest in the business but don’t take much responsibility.
- Sole Proprietorship: This is one of the simplest business types. To be a sole proprietor means being the only person who owns and manages the business. This business type is excellent for small businesses, freelancers, and self-employed individuals but is limited by the amount of capital available and the ability to get outside assistance.
- Non-Profit Organization: Non-profit organizations are businesses funded by donors and other entities that support their mission of serving the public good. Although the major benefit of this type of business is granted tax-exempt status, non-profit organizations tend to have limited resources for hiring.
- Corporation: Corporations are large businesses with limited liability and shareholders that invest in the business. It’s a legal entity separate from its owners, meaning that the owners cannot be liable for the corporation's debts, but a corporation can own assets and borrow money.
Forming a partnership with limited partners creates a safety net for the business owners' personal assets. For example, through an LLC (Limited Liability Company), one can benefit from its legal protection.
A partnership agreement for LLC includes the creation of a financial barrier between the owner and the company. A partnership LLC can afford the same legal protections as a corporation while requiring less paperwork and fees.
However, the disadvantages of this setup include the liability of the general partner(s), a lack of control for the limited partners, and a lack of investment flexibility.
Forming a Partnership
Forming a partnership is a relatively simple process as it doesn’t involve a formal incorporation process through the government.
You can register your partnership within the states where you hold your business, but note that the requirements for a partnership vary per state.
However, a partnership agreement must take place for a partnership to form to ensure all parties within the partnership abide by the rules of the partnership.
This agreement is solidified through a written contract detailing the terms and conditions of the partnership that should be followed by all parties involved to maximize the best outcome for the business.
Types of Partnership (S Corp and C Corp)
Are you unsure what type of partnership to go for? It’s best to assess and identify the format you desire for your business first. Suppose you’re planning to form a partnership with an LLC. In that case, you may find yourself exploring the corporate structures of S Corp and C Corp.
Both corporation formats fall under similar provisions regarding ownership and capital generation. They provide limited liability to the owners and oversee the partnership through a board of directors, with the general executive handling the day-to-day operations.
Although they’re similar, S Corp and C Corp are differentiated by taxation, flexibility of ownership, and scale of operations.
For taxation, C Corp businesses are treated as a separate legal entity by the U.S. Internal Revenue Services (IRS) and take part in double taxation, where the shareholders are liable to pay personal income tax. S Corp businesses aren’t charged at the corporate level, acting as a sole proprietorship where the personal income tax is charged to the owners.
Regarding flexibility of ownership, C Corp businesses have unlimited shareholders, while S Corp businesses mustn't have over a hundred shareholders.
C Corp businesses are ideal for bigger firms, while S Corp businesses are suited for smaller or new ones.
Forming a partnership means registering your business or company in the USA with an incorporation cost. Depending on the state, incorporation costs range from $600 to $1400.
Register Your Partnership with NCH
If you plan to form a partnership, NCH provides the best business formation experts to help you register your partnership.
Unleash your business’s potential. Call 1-800-508-1729 or visit our website to schedule a consultation with us today.