A partnership is an arrangement in which two or more individuals combine resources with a view towards sharing expenses and profits. Generally, there are two types of partnerships – general partnerships and limited partnerships. In a general partnership, the partners share in the management of the business and each is personally liable for all debts and liabilities of the business. Limited partnerships limit the liability of each partner to the amount that partner has invested in the business. Limited partners are not personally liable for debts of the business, but are prohibited from participating in the day-to-day management of the business.
It tends to be less costly to establish a partnership than a corporation because there tends to be less government reporting requirements. Annual information returns are normally required for tax purposes, but income or losses of the partnership are typically reported on the personal tax returns of the partners.
One of the greatest advantages of a partnership is the ability to share in the unique skills of each partner and combine the financial resources of the partners. A significant disadvantage, however, in the case of general partnerships, is that each partner is personally liable not only for their own business debts, but for those of all partners in the partnership. A partnership can also be difficult to dissolve should disagreements arise between partners. Having said that, establishing a Partnership Agreement at the beginning of the relationship can set operating guidelines and address the process for resolving disagreement for the benefit of all partners.
Robin Muir, CFP®, CLU®, CH.F.C.