Understanding Ownership and Business Entity Structures 2

What are the advantages of a partnership?

The chief advantages of a partnership are:

• It lets you pool resources with others to build a larger, more profitable business.
  
• It is easy for the partners to take money out of the business. This is one of the reasons many professional practices use a partnership format.
  
• The life of a partnership can be easily limited to suit your needs. Thus a partnership can be formed for a specific project or to achieve a specific objective and can then be dissolved.
  
• It may allow you to bring needed capital into the business to finance long-term projects or growth.
  
• You may have lower costs and fewer legal regulations than you would running the business as a corporation.
  
• The partnership itself does not pay income tax. All profits and losses get passed along to the individual partners.

What are the disadvantages of operating a partnership?

Disadvantages of running your business as a partnership include:

• Partners don’t always get along. Frequent causes of disagreements are disputes over workloads (who is doing how much); spending (one partner thinks the other is a penny-pincher and the other thinks the first is a spendthrift); and methods of operation.
  
• Each general partner is liable for the actions of all the other general partners. Thus, if your partner leases a new Mercedes in the partnership name and then skips town with the car, the partnership—and you personally as a partner—would be responsible for paying for the car. The same holds true if your partner commits the partnership to any contract or does anything illegal in the partnership's name.
  
• You may incur more legal fees with a partnership than with a sole proprietorship. Although it isn't always done, it is in your best interest to have a formal partnership agreement with your partners and to have the agreement drawn up by an attorney, or at least reviewed by one. If you don't have a formal partnership agreement and the partnership ends, you are likely to end up with even more legal fees to untangle disputes over partnership debts and assets.
  
• Changes in ownership mean the partnership technically comes to an end (dissolves); if a partner is bought out or a new partner is added, however, the business can continue.
  
• Fringe benefits, as with sole proprietorships, are limited compared to those available with regular corporations.

Does my spouse automatically own part of my business?

Depending on the state laws where you live, your spouse may automatically have a legal interest in your business and be entitled to a share of the business if you divorce. This holds true even for partnerships, (The partner's spouse may have a legal interest in the partnership even if he or she has never been involved in the operation of the partnership.)

What happens if my spouse and I get divorced?

Depending on where you live and what precautions you have taken, you might have to "buy out" your spouse's interest in the business as part of a divorce settlement, even if the spouse has never worked in the business.

I'm thinking about going into business with a friend. Are we both sole proprietors?

According to the Uniform Partnership Act (UFA), which is a body of law that establishes basic guidelines for partnerships, a partnership is "an association of two or more persons to carry on as co-owners of a business," If you and your friend work together in the business you would be considered partners, whether you formally agree to be partners or not. That means you would each be bound by all the rights and responsibilities and liabilities of a formal partnership arrangement. Thus it would be advisable to have a formal partnership agreement with your friend.

Why do we need a partnership agreement?

While you and your partner may be the best of friends now, it is very easy for misunderstandings to develop in a partnership, just like it is easy for misunderstandings to develop in any agreement that isn't written down. Several psychologists who were also good friends learned this lesson the hard way. They agreed to open a jointly run practice. They were advised to have a formal partnership agreement, but since they were all "experts" in dealing with human relationships, they decided it wouldn't be necessary, Less than a year later their joint effort ended, leaving them engaged in bitter and expensive legal disputes over ownership of partnership property and responsibility for various debts.

What should a partnership agreement cover?

Among the basic points that should be explained in the agreement are:

• the name of the partnership
  
• the function or purpose of the partnership
  
• the duration of the partnership
  
• the duties and extent of authority of each partner
  
• the number and kinds of partners (limited, general, silent, etc.)
  
• the method for admitting new partners
  
• the method for dissolving the partnership should the partners be unable to work together
  
• the contributions (money, labor, equipment, etc.) of each partner to the partnership
  
• the method for dividing profits and losses
  
• how the books will be kept
  
• how property used in the partnership will be owned
  
• the method to be used to resolve disputes
  
• how absences from the business or disability will be handled
  
• what buy-out procedures should be followed in the event that a partner should leave the partnership or die

What happens if we don't have a partnership agreement?

If you don't have a partnership agreement and your partnership breaks up, you have no way of proving any verbal agreements about who contributed what to the partnership or whether anything contributed to the partnership became partnership property or remained the property of the original owner. Thus any business equipment you brought into the partnership (your computer system, scanner, and laser printer, for example) could be considered partnership property that has to be sold to pay the partnership's debts or split up between the partners.

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