Choosing the right structure is one of the most important decision you’ll make as an entrepreneur. The structure you choose can affect your taxes, liability and financing options.
Many entrepreneurs who start a business with one or more individuals such as a spouse, family member, friend, or business associate consider forming a partnership. While partnerships can offer several advantages, they also come with many risks that must be carefully evaluated before moving forward.
At KD Professional Services, we help business owners understand the tax and financial implications of different business structures. Every business situation is unique so we recommend you speak with us first before making a decision.
Let’s take a closer look at how partnerships work and whether they may be the right choice for your business.
What Is a Partnership?
A partnership is a business structure where two or more individuals own and operate a business together. It is generally not taxed as a separate legal entity. Instead, the business income or losses flow through to the partners, who report their share on their personal tax returns.
The percentage of profits or losses allocated to each partner depends on the ownership arrangement.
Advantages of a Partnership
1. Greater Access to Capital
One of the biggest benefits of a partnership is the ability to combine financial resources of the multiple owners. This can allow the business to grow faster than a business under a sole proprietorship.
2. Improved Borrowing Potential
Lenders may view partnerships more favorably than sole proprietorships because there are multiple owners supporting the business. As a result, partnerships may have better access to financing options.
3. Shared Knowledge and Expertise
A successful business requires a wide range of skills. Each partner can bring their expertise in a particular area and can be a great advantage to the business.
Disadvantages of a Partnership
1. Unlimited Personal Liability
One of the most important drawbacks of a general partnership is unlimited liability. The owners are personally responsible for the debts and obligations of the business.
2. Business Continuity Challenges
A partnership may not automatically continue if a partner leaves, retires, becomes incapacitated, or passes away.
3. Higher Setup Costs Than Many People Expect
Many entrepreneurs assume partnerships are simple and inexpensive to establish. However, a properly drafted Partnership Agreement is strongly recommended and often requires legal assistance which may be quite costly.
How KD Professional Services Can Help
Selecting a business structure is not a one-size-fits-all decision. Our goal is to help you choose a structure that supports both your immediate needs and your long-term business success.
KD Professional Services provides professional accounting, bookkeeping, tax planning, and business advisory services for entrepreneurs and small business owners.
Contact KD Professional Services today to discuss whether a partnership, corporation, or another business structure is the best fit for your business goals and future growth plans.