Partnership: Advantages and Disadvantages
Since Bob and Jane wants to retain ownership between themselves, and since there are nothing in the information that says something about their sources of funds, I would recommend that they start up a limited partnership.
A partnership is composed of two or more persons who commits to put in money or industry to a common fund, intending to divide profits among themselves later on. The essential characteristics of a partnership are: collaboration of two or more owners, doing the business for profit (nonprofit entities cannot form a partnership), and the sharing of losses, profits, liabilities and assets by the joint owners (Encyclopedia of Small Business, undated). A partnership, however, is very adaptable since persons can mean to be an individual or companies. Bob and Jane can share directly in the partnership’s profits and control of the business (Cochran, 2007).
Advantages of a Partnership
Partnership also fosters collaboration. Since Bob and Jane have different talents, collaborating is a prime advantage of their enterprise. Collaboraton draws on the resources and expertise of each partner. Each partner shares the responsibilities and lighten the work load (Encyclopedia of Small Business, undated).
Tax consideration in a partnership is also advantageous. The profits are passed through to Bob and Jane who then report their shares on their individual tax returns. In effect, the profits are only taxed once as part of the owner’s earnings, and not as the earnings of the partnership (Encyclopedia of Small Business, undated).
Bob and Jane will also benefit from a partnership’s simple operating structure. It is easy to establish and run, with only a few or no forms at all that needs to be drafted. There are also no annual filing fees (Encyclopedia of Small Business, undated). The partnership is also relatively easy to manage since it will involve only Bob and Jane, as opposed to a corporate set-up with its shareholders, directors, and officers who all make some degree of decisions (Encyclopedia of Small Business, undated).
Bob and Jane will also experience the comfort of not being required to know a lot of laws, since partnership laws vary little from state to state and over time due to the Uniform Partnership Act, which provides a consistent set of laws about partnerships. The Uniform Partnership Act makes it easy for Bob and Jane to get to know all the laws that would affect their business. Moreover, because of the Uniform Partnership Act, interstate business will be easier (Encyclopedia of Small Business, undated).
Bob and Jane will be able to get loans on a personal level on much better term using both personal and the partnership’s assets as guarantee. Banks also see partners to be less risky than corporations (Encyclopedia of Small Business, undated).
Partnerships, however, holds both of them jointly and independently liable for its debts and other obligations (Cochran, 2007). This means that whatever financial and legal obligations the partnerships acquires, Bob and Jane are personally liable for it. This situation gives rise to the danger of Bob’s car, for instance, being sold for a loan that the partnership gets.
Partnerships are also vulnerable to dissolution upon the death, retirement or withdrawal of one partner. (Encyclopedia of Small Business, undated). However, since the duration of the business that Bob and Jane wants to set up is not presently known, this should become an advantage for them, because it allows for ease in dissolving the partnership any time they wish to do so.
Another issue with partnerships is trust. Running a partnership means one has to give up absolute control of the business, and making sure that every partner is given equal opportunity in making decisions for the business (Encyclopedia of Small Business, undated). But since Bob and Jane are married to each other, it is safe to assume that the trust is there. The Encyclopedia of Small Business, however, suggests anticipating problems, decisions, even operations protocols and drawing them up in a partnership agreement that would specify how each dilemma would be dealt with (undated).
I will consult with Bob and Jane that if they should choose to form a partnership, they should first come up with a name. Something catchy and obvious as to the nature of their business would do. The Encyclopedia of Small Business adds that it should not closely resemble any existing name of any other business entity (McDonnell’s is out) and most states require the inclusion of the words “Company” or “Associates” in the name.
I will not recommend forming a corporation in this case. Since Bob and Jane are just starting up, with no previous experience in handling a business, the complexities of forming and running a corporation might overwhelm them.
For one, corporations are very costly to form and run. Bob and Jane would have to worry about fees to file legal documents like the articles of incorporation, government filings, tax prepayments, and attorneys’ fees. Bob and Jane would also have to go through a lot of formalities. Corporations are required to submit balance sheets and other financial statements, as well as corporate disclosures. Things that might not be necessary in running Bob and Jane’s business since they are also the only shareholders in the venture. What’s more a corporation, although it has provisions to exist perpetually, is open to voluntary or involuntary dissolution. Bob and Jane will also pay taxes twice with a corporate setup: once when they make a profit and again when dividends are paid (Harroch, 2006, p. 2)
Also, Bob and Jane cannot form a sole proprietorship. While it is the easiest to form in terms of cost and formal requirements, sole proprietorships—by definition—involves one individual who owns the business (AllBusiness.Com, 2006, p. 1). Bob and Jane both want to own the business.
- Partnership: Advantages and Disadvantages. Inc.Com. Retrieved on 4 April 2008. <http://www.inc.com/articles/1999/10/14602.html>
- Advantages and Disadvantages of Sole Proprietorships. AllBusiness.Com. Retrieved on 4
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April 2008. <http://www.allbusiness.com/business-planning/business-structures-sole-proprietorships/2512-1.html>
Cochran, Sarah. Partnership. Cornell University Law School. Retrieved on 4 April 2008.
Harroch, Richard. (2006.) Advantages and Disadvantages of Forming a Corporation. Retrieved
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Partnership. Encyclopedia of Small Business. Retrieved on 4 April 2008.