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Should you form a small business partnership? 

Small business partnership: An overview 

A small business partnership is one that consists of two or more owners or managers.  This small business structure is considered to be an entity separate from the owners.  The partners do not individually own the assets of the company; instead they own a percentage of the small business assets. This is an important distinguishing feature from the proprietorship, in which the small business and all of its assets are considered as one and the same, as owned by the proprietor. 

Small business ownership of a partnership: 

Management of a partnership may take one of several forms.  The structure will depend to a great extent upon the type of small business, the amount of individual investment, desired involvement of the partners, their level of expertise, and the trust that each has in the others in the small business. 

Owners of small partnerships in which they have daily interaction and mutual trust, often opt for an informal management structure in which routine decisions are made by the partner in charge.  More important decisions in these small businesses are made by consensus when the partners meet during the daytime or at specific times during the week. 

Whether you're small business is rather large or relatively small, every partner should have a written "Partnership Agreement” which spells out such things as: 

1. The duties and authority of the partners;
2. How to resolve disputes between the partners (if there are only two partners, disagreement often means "deadlock," and deadlock leads to liquidation;
3. Buyouts of a partner’s share of the small business upon dissolution or deadlock;
4. Tax treatment.

Personal liability of the small business partnership: 

As you would expect, the partnership entity is responsible for all of the debts of the partnership. This type of small business is similar to a proprietorship in that each partner is also personally responsible for all of the debts of the partnership. It is quite troubling to some of these small business owners that a creditor can collect all of the debt from any one of the partners, and is not under any obligation to collect equally from each. 

This is one type of small business without a lot of specific advantages.  Some people form partnerships because they like to work with others towards a successful small business goal.  Collaboration and increased ability to bring together more personal and financial resources are probably some of the only real advantages to this type of small business over a proprietorship. 

However, this type of small business has some definite disadvantages.  The main difficulty is that all of the partners have personal liability for partnership debts, even if one partner made a decision that resulted in liability.  Even worse, sometimes the partners in these types of small businesses are not even aware that a debt has even been created, because even though the partnership agreement may state that all decisions must be voted on, the partner who made the decision to buy an expensive purchase for the business had "apparent authority" to buy for the partnership. 

As far as income and tax considerations, the amount of income generated and taxes owed follows the pro-rata amounts specified in the partnership agreement. Income goes through individual income tax accounts and is taxed accordingly.  

These types of small business entities can be quite troublesome and expensive to resolve disputes, and should not being attempted without extraordinary mutual trust, and a well written partnership agreement. 

Information provided by the Small Business Success Kit by Suzanne Caplan 

Web page and Start Your Own Small Business Course by Paul Susic M.A. Licensed Psychologist Ph.D. Candidate CEO/President Susic Psychological Consulting P.C.

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