If you are planning to go into business with one or more people, you can choose to establish your business as a partnership, corporation, or limited liability company (LLC).

Registering and Paying Taxes

Filing a partnership, while not as simple as filing a sole proprietorship, is still fairly easy.  Depending upon where you are located, you may only need to register the business name by filing a partnership certificate and obtaining a business license.  With regard to filing taxes, partnerships, like sole proprietorships, do not pay income taxes.  Each partner must, however, file Schedule E of Form 1040 to report how much of the business profits (or losses) are allocated to him or her.

Risks

With a partnership, the risks to your personal and business assets are similar to the risks assumed by the owner of a sole proprietorship.  In essence, this means that you have unlimited liability with regard to all business debts and any judgments entered against the business.

Fiduciary Duty

Each partner has the right to know everything that goes on in the business (financial or otherwise).  Keep in mind, however, that while each partner is expected to act in good faith and with sound judgment, each can unilaterally take actions or make business decisions that are legally binding upon the business – and the other partners.

Husband and Wife Businesses

Unincorporated businesses owned by married couples are usually classified as a partnership, and the spouses must file an annual partnership tax return (IRS Form 1065) and an IRS Form 1040.  However, by classifying the business as a “qualified joint venture” they can avoid having to file an additional tax return and ensure that each receives the proper Social Security credit.  However, there are several requirements that must be met, including the following:

• They must be the only owners of the business
• Both spouses must actively participate in running the business
• The business is not held in the name of a partnership or LLC

Buyout Provisions

By law partnerships do not have to have signed, written agreements; they are covered by one of two partnership acts.  In states that are governed by the Uniform Partnership Act, your partnership will not be automatically dissolved if one of your partners leaves or dies.  If you live in one of the states that has adopted the Uniform Partnership Act, however, you should make provisions to allow partners to purchase life insurance, which can be used to “buy out” the partner who leaves (or, in the case of a partner who dies, to compensate his beneficiaries).

Get it in Writing

Though not required by law, you should protect yourself and your business by drawing up a legal partnership agreement and having each partner sign it.  Drafting a formal agreement forces the parties involved to discuss issues and make plans, such as deciding how profits are to be divided, how disputes will be resolved, and how changes in ownership will be handled.  More than half of all startups fail due to conflicts.  Drawing up a good partnership agreement can help you avoid disputes down the road.