Overview of Partnership Requirements River Region Chamber of Commerce | Tools for Business Success

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Overview of Partnership Requirements Go to topics

Before we begin the for is basic information about partnerships and taxes.

What is a partnership? A partnership is a business owned by two or more individuals or entities. For example, two corporations can form a partnership. Partnerships can have employees and operate in all the ways that a corporation or sole proprietorship can. The difference is that the financial and legal responsibility for everything rests with the partners. The partners have unlimited liability, which means that their personal assets can be used to pay for business debts.
General versus limited partnerships   If you have investors who will not be directly involved in the business, you may form a limited partnership, where the investors have limited liability protection. Anyone who is involved in the business must be a general partner, and all limited partnerships must have at least one general partner. There are forms for limited partnerships, but this kit does not contain a partnership agreement for limited partners. Please contact an attorney.
Can my spouse be a partner?   Yes, although Louisiana is a community property state and if your spouse is not directly involved in the business, forming a partnership is unnecessary. You should form a partnership if your spouse is directly involved in the business and wants social security benefits paid on his/her behalf.
Partners are responsible for each other's actions  Partners are responsible for the actions and debts of their partners, even if they were unaware of those actions. So it is best to know your partners well and make sure that you both have similar sized assets at stake. If not, consider forming a limited liability company or a corporation.
What if I want limited liability protection?  You can either form a limited liability company or a corporation. Limited liability companies are more flexible than corporations because you do not have to have annual meetings with minutes.
Can I incorporate or form an LLC later?  Yes, but legally and for tax purposes, you will have to "close down" the partnership and "open" the new corporation or LLC. Your customers won't be affected, but you will have to go through the paperwork and accounting processes.
Revenue versus profit   Hopefully your business will have lots of sales...however, don't make the mistake of believing that your sales revenue is available for hefty personal salaries or business expansion. Payroll must be paid first. Then you will have to pay for your cost of goods and your operating overhead. About 50% of the amount remaining must be paid in taxes (28% federal; 2% to 6% for state taxes 15.3% self-employment tax). The remaining is available for your after-tax salary and business expansion.