I wrote earlier today about how to understand what a sole proprietorship is and evaluate whether or not this is the legal structure for your home business. Since we are focusing on legal business structures, it seemed the next logical type to discuss is the “partnership.” While sole proprietorships are the easiest form of business to start and more common for small, home businesses—partnerships are a possibility too.
The basic requirement for a partnership is that you have a partner! This means another individual with whom you go into business with. You do not have to be equal partners or even split the proceeds or business down the middle. You can even have more than one partner. In a partnership, while you may divide up the profits and assets based on a legal agreement, both partners carry the obligations for the debts and liabilities of the business. It is important to have good legal counsel and draw up contracts and documents that explain the nature of your partnership. For example, you can have a “silent” business partner who is someone who invests money and has a legal share in the business but who does not actually get involved in the day-to-day operations. Unless this agreement is spelled out carefully and everyone understands the arrangement, things can get confusing.
In a partnership, each partner will be treated as an owner for tax purposes and have to report income and expenses. The business does not exist as a completely separate entity like a corporation. One of the benefits of a partnership is that if one person decides to get out of the business, the other partner can take over or buy out the other person’s share. This way, the business does not end when one person decides to quit. Again, you will want to get legal and financial advice on how to set up a workable partnership and make sure all your bases are covered.