You’ve decided to either start a new business venture or buy an existing one with someone else. One thing that you should look at is what sort of business entity you will be operating your business through. If you and another person undertake a business venture together you are faced with two possibilities – you can either form a partnership or incorporate your business. It may be helpful at the outset to consider the method of carrying on this business with your accountant or lawyer, as it may help you and your business down the road.
When two or more persons carry on a business together with a view to profit, the relationship is called a partnership. The partnership is like a sole proprietorship in that the partners are carrying on the business themselves directly. In contrast, a corporation is a separate legal entity from its shareholders. If you choose this method of carrying on business you would be operating the business through the corporation. This is significant, in that, as a separate legal entity, any income or losses are taxed in the hands of the corporation and not its shareholders. A partnership is not a separate legal entity from that of its partners and, as a result, the income or loss of the business carried on by the partnership is allocated to each of the partners. If losses are created at the start of carrying on a business (as they typically are) they flow directly to the partners. The partners can then apply these losses against his/her income from other sources of income. This provides an advantage over a corporation in that a corporation can only use losses against its income and not of its shareholders. In addition, when a partnership business takes off, and the partners wish to incorporate, a partnership can generally transfer its assets into a corporation on a tax-free basis.
A partnership does have some disadvantages, however. Under the Partnership Act, in the absence of any agreement between the partners, a partnership is dissolved by the death or insolvency of a partner. In addition, a partnership may be dissolved merely by one partner giving notice to the other partners of his or her intention to dissolve the partnership. As a result, a partnership should have a written partnership agreement among all the partners that accounts for the question of automatic termination of the partnership and the withdrawal of partners.
A partner is also liable for all the liabilities of the partnership. This is in contrast to a corporation where a shareholder is not required to account for the liabilities of the corporation. However, this may not be such a problem given that most banks and loan companies ask a shareholder of a new business to personally guarantee the debts and obligations of any loan. As a result, this advantage may not be so critical for a new business.
A partnership may not be suitable for all types of businesses. When making this decision you may wish to contact a lawyer or accountant to discuss in detail which business vehicle is appropriate for your business.
However, it may be worthwhile to give partnerships a second look.
