When starting a business, one must legally define it. How the business is established can bring individual advantages or disadvantages. There are three filing options: proprietorship, partnership, and C corporation.
A partnership is a business run by two or more individuals. When forming the business, the partners may have put their agreements into writing. If not, there can be discrepancy and confusion over many things, including profit distribution.
Profits are usually shared by partners in predetermined ratios. Salaries and interests may be also distributed among them. In contrast to how a proprietorship functions, in a partnership, a greater distinction is made between things belonging to the business and those belonging to the partners. Those that belong to the business partnership are owned jointly as a group.
Typically, all partners will participate in some form of management of the business. Outsiders have the right to assume that all partners have the authority to make decisions for the business unless any restrictions by the partners have been made known.
The Pros of a Partnership
- Can continue its existence and operation even if a partner withdraws from the business although they may encounter some financial difficulties
- Can do anything an individual can do, via one of the partners
- A partner can draw on the wealth, borrowing power, and management strengths of more than one person
- Partners are subject to income taxes only on their share of partnership earnings.
The Cons of a Partnership
- Business creditors can claim payment from the personal wealth of the partners just like in a proprietorship. However, business creditors have a prior claim to payment from the resources of the business over the personal creditors of the partners.
- The more partners there are, the more hazardous it can be for an individual partner who is at the mercy of the other partners’ decisions.
- Are legally ended when a partner leaves and must have the agreement of all the others to admit a new one.
- May be difficult to agree with other partners