2. GENERAL PARTNERSHIP:
General Partnerships, where more than one person own and operate the business but have not formed a legal corporation, have two major advantages; they do not pay taxes themselves and they are easy to form. Of course as the pendulum swings, the disadvantages far outweigh the benefits. Liability is shared by each owner, and each partner is personally liable for the debts of the enterprise whether or not they all caused them.
Funding too, may be difficult because the firm cannot sell shares as a corporation does, and all capital needs must be met by contributions from the partners or by borrowing, again increasing debt. Management has to be carefully outlined in a formal contract, otherwise potential disagreements may arise, with all partners having an equal say in running the business.
It’s better to delegate responsibilities upfront and in a contract to avoid these types of conflicts. The other pitfall for owners in a general partnership is that each owner may only transfer the value of the interest in the business, not the interest itself. Therefore, whoever receives the transferred value, may not have the right to be a partner in the firm, or even work there. General partnerships are not taxable entities, and all income and losses are passed through to the partners and reported on their personal income taxes.