Partnership & LLP
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations
What Is a Partnership?
A partnership is a formal arrangement by two or more parties to manage and operate a business and share
its profits. One of the major advantages of a partnership is the tax treatment it enjoys. A partnership doesn’t pay tax on its income but “passes through” any profits or losses to the individual partners. At tax time, the partnership must file a tax return (Form 1065) that reports its income and loss to the IRS. In addition, each partner reports his or her share of income and loss on Schedule K-1 of Form 1065
Advantages of Partnership
1. Easier formation: It is straightforward to form a partnership business. It requires fewer legal formalities, and the cost is also low. The registration of the firm is also not required to create a partnership business. Only the partners should have an agreement between them.
2. Flexibility: A partnership firm has minimum legal formalities and is also free from government control. Hence, the partners can make changes in the firm according to their preferences. They can make changes in the size of the capital, the size of the business, and the management structure without any excess legal procedures. When it is necessary, the partners can make decisions in the firm based on the external environment changes.
3. Risk sharing: A partnership firm usually has a lot of members. Since the members agree to share profits and losses equally, the risk is also shared by all the members. As a result, compared to a sole proprietor, the burden of risk on each partner is much lower. Due to less load, the partners are motivated to take up riskier projects with higher profit margins.
4. Privacy: It is not required for a partnership firm to publish its accounts. As a result, the affairs taking place in the business remain within the business. Also, the partners are the ones who carry out the significant decisions of the business, and hence there is no chance of leakage of trade secrets, and the privacy of the firm is maintained.
5. Division of work: In a partnership, all the firm’s work is divided among the partners based on their knowledge and skills. Division of labour is possible in partnership. This division of work leads to efficient management, which results in higher profits
Disadvantages of a Partnership
By going into business as a general partnership rather than a sole trader, you lose your autonomy. You probably won’t always get your own way, and each partner will need to demonstrate flexibility and the ability to compromise.
There will be the potential for differences, large or small, with other partners. These might relate to:
The strategic direction in which the business should go (or how to get there). How to handle any number of discrete business issues that may arise. Different views on how partners should be rewarded when they put different amounts of time, skills and level of investment into the business Ambition. Some may want to dedicate every waking moment to growing and developing the business, while others may want a quieter life
Differences might not be evident immediately. Over time, partners’ preferences, personal situations and expectations may change so the fact they are aligned at the start is far from a guarantee that cracks won’t appear later.
Disagreements and disputes can not only harm the business but also damage the relationship between the individuals involved. Conflict can be a major distraction, absorbing the partners’ time, energy and money.
Limited Liability Partnership
A limited liability partnership is a partnership in which some or all partners have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not responsible or liable for another partner’s misconduct or negligence.
Benefits of an LLP
Trading through an LLP –
§ Limited liability protects the member’s personal assets from the liabilities of the business. LLP’s are a separate legal entity to the members.
§ Flexibility. The operation of the partnership and distribution of profits is determined by written agreement between the members. This may allow for greater flexibility in the management of the business.
§ The LLP is deemed to be a legal person. It can buy, rent, lease, own property, employ staff, enter into contracts, and be held accountable if necessary.
§ Corporate ownership. LLP’s can appoint two companies as members of the LLP. In an LTD company at least one director must be a real person.
§ Designate and non-designate members. You can operate the LLP with different levels of membership.
§ Protecting the partnership name. By registering the LLP at Companies House you prevent another partnership or company from registering the same name. This is not an exhaustive list but covers some of the key benefits on an LLP.
Disadvantages of an LLP include:
v Don’t exist in every state.
v LLPs usually only allow certain professions.
v No ability to file taxes as an S corporation.
v LLPs must have at least two partners.
v LLPs must have a managing partner, but all partners must help run the business