Partnership advantages and disadvantages
/A partnership is a form of business organization in which owners have unlimited personal liability for the actions of the business. The owners of a partnership have invested their own funds and time in the business, and share proportionally in any profits earned by it. There may also be limited partners in the business, who contribute funds but do not take part in day-to-day operations. A limited partner is only liable for the amount of funds he or she invested in the business; once those funds are paid out, the limited partner has no additional liability in relation to the activities of the partnership. If there are limited partners, there must also be a designated general partner that is an active manager of the business; this individual has essentially the same liabilities as a sole proprietor.
Related AccountingTools Courses
Advantages of a Partnership
The key advantages of a partnership are noted below.
Source of Capital
With many partners, a business has a much richer source of capital than would be the case for a sole proprietorship. This can give it the cash to invest in more opportunities than would be available to a sole proprietorship.
Specialization
If there is more than one general partner, it is possible for multiple people with diverse skill sets to run a business, which can enhance its overall performance. In general, this may mean that there is more expertise within the business. This can be an especially critical issue when a business has multiple areas of competitive advantage.
Minimal Tax Filings
The Form 1065 that a partnership must file is not a complicated tax filing. This simplifies the work of the partnership’s tax accountant. If this work is outsourced, then the tax preparer’s fee will be relatively low.
No Double Taxation
There is no double taxation, as can be the case in a corporation. Instead, profits flow straight to the owners. In a double taxation situation, a corporation pays taxes on its earnings, and then pays dividends to its shareholders, on which taxes must be paid by the recipients.
Disadvantages of a Partnership
The disadvantages of a partnership are noted below.
Unlimited Liability
The general partners have unlimited personal liability for the obligations of the partnership, as was the case with a sole proprietorship. This is a joint and several liability, which means that creditors can pursue a single general partner for the obligations of the entire business. This is a major concern when a partner has substantial personal assets.
Self-Employment Taxes
A partner’s share of the ordinary income reported on a Schedule K-1 is subject to the self-employment tax. This is a 15.3% tax (social security and Medicare) on all profits generated by the business that are not exempt from these taxes. This can result in a substantial tax when a partner is allocated a large share of a partnership’s earnings.