Partnerships: Another Way of Incorporating a Small Business

In a partnership, two or more individuals own the small business. There are 2 types of partnerships – general and limited liability. In a general partnership, the owners are all involved in the operation of the business and share the liabilities and profits. In a limited liability partnership (LLP) the general partners share the profits and liabilities in as much as he or she has invested. An LLP can have partners that are simply investors sharing in the profits without liability.

A partnership can be advantageous for the following reasons: liability is shared, areas of expertise are combined, and each partner--but not the partnership--pays federal income taxes on the business by a Schedule K-1 form. Although a partnership “passes through” profits to its partners, as a legal entity it is required to have a federal tax ID number or EIN, and is therefore eligible for a business credit score and business loans. A partner may invest in the partnership in the form of a loan to the partnership, where the partner receives interest on the loan and the loan is a tax deduction for the small business.

On the flip side, structuring the partnership can be complex due to individual goals and conflicts between the partners. As well, at least one general partner assumes full liability and the limited liability partners risk personal liability for the small business if they become active in the operation of the small business. For help with questions about partnerships or incorporating a small business, please contact us.