Some business owners choose to create partnerships with other entrepreneurs. Business partnerships create an emotional support system for those who are new to business ownership but they also provide financial support for entrepreneurs. Not all partnerships are the same, though. Before signing a general partnership contract, it is important to know the differences between the types of partnerships.
General Partnership vs. Limited Partnership
Do you find yourself wondering “what is a partnership?” Simply put, a partnership involves two or more people sharing the responsibility of owning a business. Partnerships are unincorporated business entities in which each partner shares both profits and losses. However, there is more than one type of partnership for you to consider.
The difference between an LLC and a partnership is typically just in how much each partner wants to be responsible for. Some people prefer the advantages of a limited partnership while others prefer the advantages of a general partnership.
Taxation of Partnerships
The next question is often “how are partnerships taxed.” Partnerships are not separate entities from the people who are partners. Each person who owns a share of a company must determine his or her earnings from the partnership and make their own tax payments. Partnerships are taxed just like sole proprietorships and the people in the partnership can take advantage of the tax deductions available to sole proprietors.
Obtaining an EIN for a Partnership
Even though each partner is liable for his or her own portion of the taxes, a partnership still requires an employer identification number. EINs only apply to the partnership as it currently stands, which means changes such as one partner leaving requires legally dissolving the partnership and obtaining a new EIN. Luckily, you can begin the EIN application online with GovDocFiling.
Coming together to form a business can be very rewarding. Understanding the difference between a general partnership and a limited partnership can be a valuable guide toward making intelligent business decisions. These two partnerships are some of the most common agreements among sole proprietorships and corporations.
A general partnership is made between two or more people who agree to share equally in profits and liabilities. Individuals can have a lot of leeway in coming to this agreement; it can be as casual as meeting for coffee or as formal as drafting a contract. Partners also have the freedom to determine the governance and structure of their enterprise. As formerly stated, each partner receives an equal portion of the organization’s income on a schedule 1-K.
A general partnership company itself isn’t taxed. Typically, companies are taxed on earnings that are passed down to the owners, who then pay a tax on those same earnings on their personal tax return. Avoiding this redundancy is one of the key advantages of a general partnership, but it also opens the door to risks because it makes partners responsible for solvencies and liabilities.
A limited partnership, in contrast, offers more protection for individuals’ personal assets by limiting their liability to only the company. Partners have the freedom to manage the business as they see fit, but must sign a formal contract before starting. In addition, they receive many of the same tax benefits available in general partnerships.
A limited partnership often calls on one of the partners to take on all the risk along with the benefits. The other individual often plays a passive role with no liability. Investing as a limited liability partner is a smart, low-risk decision that more and more professionals are seeking out.
To go into more detail about general and limited partnerships, including information on starting a business, legal intricacies and financial rewards, contact us here GovDocFiling for useful insight.