Business Types Three of Three – Partnership
December 9, 2014 - 0
In previous blogs we described the proprietorship and the corporation. To recap, there are three ways you can organize a business – a proprietorship, a partnership or a corporation. In this blog we will look at the partnership.
A partnership is like a proprietorship in that it is an unincorporated business. In this case it is owned by two or more people. In terms of complexity, it is the second simplest form of business to set up and operate. As there are now more than one owner, the need for detailed partnership agreement is essential. It is equally crucial that the agreement be set up at the start. A good agreement will deal with the general structure of the business including division of duties and, most importantly, a dispute resolution mechanism that is binding on the participants. The reason to set up the partnership agreement early is that if problems and hard feelings should occur down the road, setting up an agreement at this point is virtually impossible.
From a legal standpoint, you need to be aware that in a partnership, the owners and the company are one and the same. If someone were to sue the company, they would in effect be suing the owners and the owners would also be personally liable for any damages that may result. The owners’ personal assets could be up for grabs in a settlement. Corporations avoid this to some extent as the corporation itself is the entity being sued. Regardless, shareholders and directors may still be held personally liable in select circumstances.
From a tax standpoint, there are different tax rates and filing requirements for a partnership as opposed to a corporation. In essence, the net profit or loss of the partnership business is added to the personal tax returns of the owners – generally in proportion to their stake in the business or by agreement between them. We would be happy to discuss all of this in greater detail to give you a better understanding of the differences and the implications.
When setting up a partnership, the owners could call the business anything they want as long as the name isn’t one someone else has reserved. To find out if a name is already reserved and to register a trade name the owners would go to a registry office. Since a partnership, like a proprietorship, is unincorporated, the registered name will not have Limited, Ltd., Incorporated or Inc. at the end of the name.
So, that’s a partnership – a number of individuals setting up and doing business under a trade name. It’s relatively simple to set up and run. It should only be considered if liability risks are low or acceptable. Be aware that it too has different tax and filing requirements from that of a corporation. We can certainly discuss and clarify this aspect of partnerships with you.
We have now posted blogs on the advantages and disadvantages of proprietorships, corporations and partnerships. If you would like additional information or to find out which way of doing business is best for you please give us a call. We would be glad to sit down with you to discuss your plans and determine which method of organizing your business would be optimum for your needs.
For more information contact us