Are you considering forming a partnership with your business in Arizona?
A partnership is an association of two or more co-owners who develop and run a business for profit.
You may be asking yourself, “How are Partnerships Formed?” In this article, we’ll answer that question and several others.
Owning your own business requires having knowledge in many different areas. Depending on the type of business you own, you need to have a thorough knowledge of what makes it successful.
You need to know how to market yourself. You must keep detailed records of income, expenses, and client lists. Learn how to manage day-to-day business activities.
More importantly, you’ll need to know how to legally structure your business to make it profitable for all partners.
How to Determine if a Partnership is Right for Your Business
Facts to consider when deciding whether a partnership is an appropriate business structure:
- Can the business be easily and properly managed by just a few people?
- Will adding more partners expand an existing sole proprietorship?
If either of these factors is present, a partnership entity may make sense.
If you are considering forming a partnership, there are issues you need to evaluate to determine if it is the best structure for your business.
A partnership is often less complicated to maintain compared to a corporation. Yet, there are other factors to consider before deciding which structure may be best for your business
What is a Partnership, and are there Various Types of Partnerships?
As mentioned, a partnership is a business entity or structure involving two or more owners.
Generally, partnerships form when a business is growing. The business does not require the complexity and flexibilities provided by a corporation.
There are four basic types of partnerships available to business owners operating as a joint venture.
Each partnership type allows for different levels of personal and financial responsibilities for the partners involved.
The following is a basic overview of the partnerships recognized by Arizona.
A General Partnership (GP) forms when 2 or more people agree to operate a business with equal responsibility.
For example, two people are starting a professional home cleaning business. They expect to share the workload and financial responsibilities as an equal team.
In a General Partnership, each partner handles business expenses and liabilities. They share the management duties of running the business.
A general written agreement drafted by a business lawyer is often enough for a partnership. These are also known as a partnership agreement.
A Limited Partnership (LP) iinvolvesone or more of the owners gaining more responsibility of the business. The other partner (or partners) wishes to have limited involvement in the business.
An example is two people want to start a business. The two share in the financial and workload responsibilities equally. They have a third partner who is a financial investor only.
A Limited Partnership can assure that a partner’s potential for loss cannot exceed the extent of their investment. It can also establish that they are not involved in the day-to-day operation of the business.
As with a GP, a partnership agreement is suggested when forming a limited partnership. The agreement contains details on each partner’s physical and financial responsibilities to the business.
Limited Liability Partnership
A Limited Liability Partnership (LLP) is like a general partnership in that all parties share power in the business.
Partners are generally not responsible if another partner acts negligently on behalf of the business.
A partnership agreement protects each partner from liability for the actions of another partner.
Limited Liability Limited Partnership
A Limited Liability Limited Partnership (LLLP) is a combination of a Limited Partnership and a Limited Liability Partnership. One or more owners may have more day-to-day responsibility and/or financial investment than others. A negligent act by one partner should not result in liability to other partners.
Because of the complex nature of this type of business structure, a partnership agreement that is drafted by an experienced business lawyer is strongly recommended.
Partnerships and Tax Liability
Partnerships must file a separate tax return with the IRS regarding the income, expenses, gains, and losses of the business. The liability for taxes owed goes to the people listed on the partnership agreement. They do not go to the partnership entity.
If one partner fails to hold up their end of the financials, the remaining partners may be responsible for all financial obligations.
Different types of partnerships allow for partners to have varying levels of authority of their additions and liability. To protect each partner involved, a business law attorney will draft a partnership agreement.
Partnerships and Management Structure Requirements
Partners can solely manage and operate their business. No formal meetings are required. This can make management of business partnerships easier.
If a business is growing at a rapid pace, a change from a partnership to a corporation can help. This will help owners better manage their workload. The help of qualified board members can aid in this effort as well.
What Else Should I Know About Partnerships?
There are other ways in which partnerships differ from incorporated businesses. As you decide which type of legal entity is best for your business, you may want to consider the following facts:
1. Unlike corporations or LLCs, partnerships are not considered separate legal entities. The partners are fully responsible for any financial or legal liabilities. This is why partnership agreements are crucial to a well-run partnership.
2. In partnerships, all partners are equally responsible for debts incurred by the business. LPs can let specified partners give up management duties for the sake of the business.
3. All partnerships must follow their specific state’s registration requirements. Contact our office for more information on Arizona’s requirements.
4. Partners create a name to file their business under.
Partnerships are easier to create and manage than corporations or even LLCs. There are still important decisions that partners must make before outlining their partnership.
How do I Know if a Partnership is the Right Choice for My Business?
A partnership can be a good choice for a business that is smaller and intends to stay that way for a few years but operated by more than one person.
A partnership status may not be a good fit for a business that is growing. Or if the business needs the aid of a board of directors.
Partnership do allow for more flexibility in establishing business rules and regulations. Yet, a corporation does help limit the owners’ personal responsibility for business debts and taxes.
There are many reasons why establishing a business as a partnership could be beneficial for you and your business partners.
Having a helping hand to walk you through the various avenues of business designation can save you a lot of work, time and money.