One of the many questions I’m asked regularly is “What choice of business entity should I choose in the formation of a new business?” There are many forms of business entities from a sole proprietorship or a partnership to limited liability companies and corporations. The answer as always is “It depends.” Are we starting to notice a trend in these posts?
Forming a new business is time consuming and stressful and you should consult not only an attorney, but a competent tax professional as well. The reason? There are many different forms of entities all with different positives and negatives and you should be aware of those differences before taking the initial plunge of entity choice.
This article focuses on the one of three most common entities and by no means is an exhaustive resource, but it should be a good tool for you to be able to have an informed conversation with your CPA and attorney. Specifically, this article will discuss the main positives and negatives for a Partnership. Limited Liability Companies and Corporations will come in later posts.
A Partnership is the formation of a for-profit business between two or more people. There is no requirement that the agreement be in writing for the partnership to be formed, only that there is an expression of intent to form a partnership or share in the profits or losses.
The positives of this type of entity is that it will not be subject to Texas’s franchise tax in most circumstances. It also is very easy to form due to the fact that the partnership does not have to be filed with the secretary of state to be a valid entity. The entity can be taxed as a corporation if the partners decide to do so, but partnerships are usually taxed as income spread out among the partners.
The negative, and this is a big one, is that the partners are not shielded from personal liability. Each of the partners is jointly and separately liable for all of the debts and liabilities of the partnership, regardless of the percentage of investment. To put it another way, are a partner in only a limited capacity (say 10%) and your partnership is responsible to pay some debt, but the other partners are out of the picture for whatever reason, you are responsible for the full debt. Not just your 10% interest.
Again there are other considerations that should be covered before you select your entity type and you should consult an attorney and a CPA before taking any action.
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