A business partnership refers to a legal agreement signed by two or more parties to determine shared ownership of a certain business. A partnership agreement can be established between two or more people, business companies, or even organizations.
How to Form a Business Partnership?
To establish a business partnership, the first step is the verbal agreement between two or more parties to form a new business or sharing of an existing business. After reaching a verbal agreement, a written document is created where all the details of that agreement are mentioned. Finally, this document is signed by all parties, and a lawful business partnership is formed.
In the U.S, all kinds of partnership formation, dissolution, and organization are authorized under the Uniform Partnership Act.
Business Partnership Types
Business partnerships can be formed in various ways, such as:
1. General Partnership
In this type of partnership, every party shares an equal amount of workload, profits, and liabilities of that business. All the parties are heavily involved in all kinds of business decisions and operations.
2. Limited Partnership
In this type of partnership, investors from outside are allowed to buy a certain portion of that business but have less involvement and liability. The parties who contribute more have more liability in this business arrangement.
3. Joint Venture
Multiple parties often form a strategic alliance to complete a short-term project. This type of partnership is called a joint venture, and it’s quite common among large organizations. After the completion of the project, this partnership leads to dissolution. But if the project or business has a good opportunity, this joint venture can become a general partnership.
Is There Any Difference Between a Shareholder and a Business Partner?
Although shareholders and business partnerships share several similarities, some major differences set them apart.
Both shareholders and partners have ownership of the company, but business partners possess control over all kinds of business operations. On the other hand, a shareholder only acts as an investor and has limited influence on how the business will be operated. Besides, shareholders don’t share any liability of the business, whereas partners are often held liable for all kinds of business operations.
Are Partnerships Taxable?
When you form a partnership, you don’t have to pay taxes for it. But the taxes from the business gets passed down to the individual partners. Every individual partner has to pay income tax based on their profit or loss from their partnership business.
What are the Advantages of Business Partnerships?
A business partnership can offer advantages like:
It’s fairly easier to form a business through partnership compared to other methods.
Funding becomes easy as all the partners share resources for the company’s start-up.
The workload of the business is distributed among the partners, and everyone can get rewarded for the business's success.
Valuable employees can get the chance to be a partner in the business for a long-term commitment.
What are the Drawbacks of Business Partnerships?
There are some considerable disadvantages of partnerships as well. They are:
Partnerships in business can lead to decision-making problems due to multiple opinions from different owners.
Disagreement among the partners can occur if the profit is not properly distributed based on each partner's contribution.
If one partner decides to leave the business, all the assets of that business have to be reevaluated and redistributed, which can be time-consuming and costly at times.