A recent study concluded that a new partnership is four times as likely to succeed as a new sole proprietorship. A local business law professor defines a partnership as “a law suit in the making.” Whichever view you subscribe to, knowing the pros and cons will give your partnership a better chance to be successful.
A partnership can have any number of partners and those partners bring more creativity, skill, capital and experience to a business than any of the partners individually possess.
Every partnership should have a written agreement though there is no legal requirement to do so. This agreement should specify how the partnership will operate, how it will be financed, how responsibilities will be divided among the partners, how profits and losses will be shared, and what happens to the partnership if one partner withdraws, becomes disabled or dies.
A partnership files an information tax return (Form 1065), but pays no income tax itself. The income or losses are passed through to the partners who report them on their individual tax returns in shares agreed upon by the partners – not necessarily equally. A partnership, like a sole proprietorship, pays self-employment tax on net income rather than social security taxes on wages.
Partners have similar options in the area of fringe benefits and retirement plans as those available to sole proprietors. These options include:
A major drawback to a partnership is that liability is unlimited. In fact, partners can be held liable for the actions of fellow partners.