When you’re first starting your business, consider forming it as a partnership. A partnership is a business owned and operated by two or more people. Because you won’t be the only one operating the business, you’ll have someone to bounce ideas off and make decisions with.
In a partnership, each partner contributes to every aspect of the business – money, property, labor, and skill. You and your partner will share all the management responsibilities and all the profits.
How to Form a Partnership
A partnership is extremely easy to start because it’s automatically created when two or more people engage in business with the purpose of making a profit.
You will also have to establish your business name. Your business name is either the name listed on your partnership agreement or the last names of the partners. If you want to operate your business under some other name, you and your partner will have to register a Doing Business As (DBA) name.
Some industries, states, and localities require licenses and permits, so you might have to register for those, too.
How to Protect Yourself
When you’re in a partnership, you’re responsible for your partner’s actions and decisions, as well as your own. That means, if your partner makes a bad decision, you and your reputation can be hurt, too. There are steps you can take, however, to protect yourself.
Although a partnership agreement is not legally required, it’s a good idea to have one anyway. No matter how much you and your partner agree now, you will have disagreements down the road. A partnership agreement can help you eliminate a lot of those disagreements before they become a big issue.
A partnership agreement outlines what each partner contributes to the business. It can also help you decide how to
The self-employment tax rate is 15.3% – 2.9% for Medicare and 12.4% for social security. You’ll only have to pay social security on the first $127,200 you make during the year (it goes up to $128,400 for the 2018 tax year).
Quarterly Estimated Taxes
Each partner may also be obligated to pay quarterly estimated taxes. You’re required to pay these if
you expect to owe $1,000 or more in federal taxes, and
your withholding will be less than the smaller of
90% of the tax shown on your current year’s tax return, or
Taxes for a partnership are pretty easy to file because the business itself does not have to pay income taxes.
Cons of Forming a Partnership
Unfortunately, there are some downsides to consider before starting a partnership. These include:
You and your partner can be held liable for the debts and obligations.
Because you have a partner, you’re not only responsible for your decisions, you’re also responsible for any decisions your partner makes – even if you weren’t involved in the decision.
Unlike a sole proprietorship, you cannot make decisions on your own. Instead, you have to consult your partner before making any major decisions.
You might think that you chose the perfect partner, but that doesn’t guarantee that they’ll pull their own weight. You might get stuck doing more work than you thought, if your partner tends to slack off.