What is a Business Partnership?

A partnership is an agreement between two or three individuals who enter into a business together. There are many types of partnerships business owners can form, including a limited partnership, general partnership, limited partnership with multiple members and limited liability partnership (LLP). No matter what type of partnership you choose, it is important to create a written agreement and register the business as an entity.

Types of Business Partnerships

The majority of small- to medium-sized partnerships prefer an LLC with multiple owners (members). However, we will describe all possible partnerships. If you are asked about them by an attorney or via a government website, it is important to know the differences.

  • General Partnership: This type of partnership is very similar to a sole proprietor but with more than one owner. Each partner is equal in ownership of the business. It is easy to create a GP – register your partnership as a “doingbusiness as” (DBA), and open a bank accounts.
  • Limited Partnership: An LP also includes a limited partner. The limited partner is usually an investor who isn’t involved in day-to-day operations. The general partner is usually a corporation and not an individual because the LP does not provide personal liability protection.
  • Limited Liability Company with multiple members is the best type of partnership for small businesses. The LLC is flexible in structure. A partnership agreement, which outlines the ownership shares and duties of LLC members (owners), may also be known as the LLC operating agreement.
  • Limited Liability Partnerships: This LLP works in the same way as an LLC but is for professionals such as accountants, lawyers, doctors, and accountants. The LLP offers additional liability protection to each partner. This means that the negligence of one doesn’t affect the financial or liability of the other.

How are partners taxed

All tax rates for LLC, GP, LP and LLP are the same.

However, the LLC has more tax flexibility. An LLC with limited liability can choose to become an S corporation and offer significant tax savings to its partners (members). For clarification, here’s an example:

Let’s suppose that two partners own 50/50 of the company. Each partner gets $75,000. If the company makes $150,000 in net profits, it is worth $55,000 to each partner. Each partner owes $11,475 in a 15.3% Self-employment Tax. This is $75,000 x 15.3%.

 

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There are potential tax savings if the LLC is elected Scorp tax status. Each partner is required to take a reasonable salary when electing Scorp tax status. Any net income other than the salary is considered a dividend. A dividend does not include self-employment taxes. This is a great thing.

Referring to the previous example, $150,000 net profit. If each partner received a reasonable $50,000 salary, each would receive a $25,000 dividend. The $50,000 salary would result in a 15.3% self employment tax. This would amount to $7,727 taxes on $150,000 of net profit.

Each partner would be able to elect the S-corp status for the LLC, which will save them $3,749 ($11,475 – $7,727).

How to set up a business partnership

Although a handshake can be all it takes to start a business partnership, it is important to register your partnership to ensure that personal assets are not subject to lawsuits or creditors. These are the steps to create a multi-member LLC.

  1. Draft a Partnership Agreement, LLC Operating Agreement
  2. Consult an attorney to review the Partnership Agreement
  3. For the partnership, choose a name that is easily identifiable to the public
  4. Register the partnership as an LLC on the state’s official website for business registrations or via an online legal services – expect to pay between $40 and $500 for this registration
  5. Publicize a notice in your local newspaper announcing the formation of your LLC partnership. This is an ancient process, but it is still necessary in many states.

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What is a Partnership Agreement?

A business partnership is similar to a marriage. A broken relationship can have serious legal and financial consequences. A partnership agreement is a crucial legal step before you start any partnership.

This agreement describes the structure of the partnership. It includes details such as the purpose of the business and the percentage of ownership. This agreement will also serve as the legal document that outlines what to do when there is a difficult business situation such as an exit or illness.

 

Not required by the state. If the LLC is being registered, the LLC operating agreement could include information about the partnership. You can also draft each document separately.

 

You can create your own partnership agreement , or hire a business lawyer to do it for you. We recommend that you have an attorney review any agreements you create. An Rocket Lawyer attorney can review your document for $50 if you are just starting a new business. A local attorney can help you with more complex documents.

A Business Partnership Alternative

You now know what a general partnership is and how an LLC with multiple members works. Now you might be wondering where a fits in.

Most small-to-medium-sized businesses will not register as a C-corp. Maintenance is too complicated and taxes are too costly. C corporations are subject to double taxation: at the corporate level (21%), and at the individual level (21%).

A C corporation may be the best choice for smaller businesses such as startups. C-corps are more friendly to investors than S-corps. They allow unlimited shareholders while the S-corp has fewer than 100 shareholders. If the owners intend to keep a significant amount of profit, the C-corp tax rate is 21 percent.

A business attorney can help you with your particular situation.

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Bottom line

It’s an exciting venture to form a business partnership. To build a successful business, you’ll be joining hands with one or more people. Based on your company’s structure, you will need to decide the best partnership arrangement. To ensure that all partners are on the same page regarding the company’s future, you should draft a partnership agreement. Register as a business entity, such as a multi-member LLC, before you take on customers. This will protect you from any personal liability.

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