Description of a partnership: A partnership is similar to a sole proprietorship in many aspects, except that a partnership consists of two or more owners. Generally, every partner contributes to the business several ways, which may include contributions such as funding for the business, assets or property to be utilized, work and/or expertise. There are three general types of partnerships:
- General Partnerships. In many General Partnerships owners work together to operate the business and split the profits equally. If the partners do not contribute equally, provide an equal amount of work or services, or have an equal split of profits, these arrangements should be acknowledged in a partnership agreement.
- Limited Partnerships. Limited Partnerships are generally used for short term projects. In a Limited Partnership, partners may elect to have limited liability and limited involvement.
- Joint Ventures. Joint ventures are similar to General Partnerships, except the intent is generally for a single project or short time period.
FORMING A PARTNERSHIP
In Colorado, forming a partnership is simple and inexpensive. In Colorado, the person creating the Partnership can do so on-line at the Colorado Secretary of State website. On this website, a person can do a name search to see if the desired name is available. Even if the desired name is available, it is a good idea to look for similar names. The members should consider not using a name that is too similar to other company names to avoid any confusion, or more importantly, be associated with a business that has a negative reputation. The Colorado Secretary of State provides a fill in the blank form called the Certificate of Limited Partnership, Statement of Registration (Limited Liability Partnership), certificate.
Partnership Agreements. Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.
Most businesses will need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit.
A partnership must file an “annual information return” to report the income, deductions, gains and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business “passes through” any profits or losses to its partners. Partners include their respective share of the partnership’s income or loss on their personal tax returns.
Partnership taxes generally include:
- Annual Return of Income
- Employment Taxes
- Excise Taxes
Partners in the partnership are responsible for several additional taxes, including:
- Income Tax
- Self-Employment Tax
- Estimated Tax