Should I create a partnership?

A partnership is similar to a sole proprietorship, except you are running the business jointly with somebody else. What is misunderstood about partnerships is how easy it is to become one. As soon as you shake hands and decide to make profits together, you become a partnership. In fact, your children’s lemonade stand is a partnership that should file a partnership tax return. The partners to a partnership will also pay self employment tax on their share of the income generated by the partnership.

What is great about a partnership is that it is a very flexible entity. Oftentimes, when two or more people get together to start a business, it is unclear as to who will make the greatest contributions, do the most work, or bring in most of the business. In fact, it is common that the performance of a partner is not quite what was expected which leads to problems in the business. The partner you thought was wonderful becomes something very similar to a messy roommate. Partnerships can be structured so that even under a 50-50 profit split arrangements, a disproportionate distributions can be taken from the partnership to compensate partners for their contributions that are inconsistent with the original 50-50 agreements. These disproportionate distributions are impossible under an S Corporation arrangement which is quite common structure for new entrepreneurs to use. S corporations and C corporations must make profit distributions according to the number of shares owned by each owner.