Many great ideas stem from collaborative efforts. In such circumstances, your company will likely be structured as a partnership, meaning that two or more people share ownership of the business. When people come together as business partners, they are required to all contribute to the company in terms of money, property, labor, and skill, and in turn they all receive their share of profits (or losses).
However, as the old saying goes, “too many cooks spoil the broth,” and sometimes it’s best if the decision-making be left up to one or two individuals. That’s why there are different kinds of partnerships that are structured differently.
Different Kinds of Partnerships in Business
General Partnerships: Under a general partnership, all of the partners equally split the management responsibilities, liabilities, and profits that come from the business. In some cases, partners will opt for an unequal distribution of responsibilities and assets, which would need to be noted in the partnership agreement documentation.
Limited Partnerships: Limited partnerships are also called partnerships with limited liability, which provides some insight into what these arrangements entail. In a limited partnership, some partners will take on less liability, but their profits and managerial input will be limited as well. The limitations for each partner are based on the partner’s percentage of investment, which makes limited partnerships attractive arrangements to those looking for short-term investments.
When you decide to form a partnership, you have to start by registering your business with your state. This is usually arranged through the Secretary of State’s office. Afterward, you establish your business name—this is either the name listed on your partnership agreement, or the last names of all of the partners involved. If you decide to run your business under a different name than your officially registered one, you’ll probably have to file for a “fictitious name,” also known as an assumed name, trade name, or DBA (‘doing business as’) name.
Depending on where your business is located, you’ll have to file for and obtain a variety of licenses and permits pertinent to your industry and area. Next, you’ll have to figure out how taxes work.
Partnerships are typically required to register with the IRS, state and local revenue agencies, and will then be given a tax ID number or permit. Partnerships are distinctly different from corporations when it comes to tax responsibilities. While a partnership is required to report its income, deductions, gains, and losses with an Annual Information Return, the business does not pay income tax as its own entity. Any gains or losses that come from the company’s operations are passed along to the partners, who report their respective shares of income and loss on their personal tax returns.
Tax laws are rough waters to navigate, especially when the territory is unfamiliar to you—call the tax professionals at JRH & Associates at (516) 794-5752 today for answers to your questions about how different types of businesses are taxed!