Software of the Month Club 1997 March/Software of the Month Club 1997 March.iso/pc/dos/lg/sba/f111.sbe

Text File | 1996-10-05 | 7.8 KB | 176 lines

@091 CHAP 2

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         │ PARTNERSHIPS:  ADVANTAGES AND DISADVANTAGES │
         └─────────────────────────────────────────────┘

A business partnership is much like a sole proprietorship
in many respects, except that it has two or more owners.
Creating a partnership can be a very simple matter, since
the law does not require any formal written documents or
other formalities for most partnerships.  However, as a
practical matter, it is much sounder business practice for
partners in a business to have a written partnership agreement
that, at a minimum, spells out their agreement on such basic
issues as:

    . How much and what kind of property will each
      partner contribute to the partnership?

    . What value will be placed on the contributed
      property?

    . How will profits and losses be divided among the
      partners?

    . How will gain or loss be allocated for tax purposes
      on property contributed to the partnership by one or
      more of the partners, where such property has a
      tax basis significantly greater or less than its
      agreed value?

    . When and how will profits be withdrawn from the
      partnership?

    . How will certain partners be compensated for their
      services to the partnership (if at all)?

    . How will partners be compensated for making capital
      available to the partnership?

    . How will changes in ownership of interests in the
      partnership be handled?

    . When will the partnership terminate its existence?

    . How will the assets and liabilities of the partnership
      be handled when the partnership is terminated?

A written partnership agreement should be prepared by an
attorney and, if possible, should be reviewed by a tax
accountant before it is put into effect.

Keep in mind, when considering a partnership arrangement,
that partnerships are a bit like marriages--they usually
start out with a great deal of trust and have a very
high break-up rate.  Like marriages, it has been said,
partnerships are easy to get into, require a lot of
patience and understanding to live within, and are often
costly and painful to get out of.

Each partner is an agent for the partnership and can do
anything necessary to operate the business, such as hire
employees, borrow money, or enter into contracts on behalf
of the partnership.  Each partner, except for a LIMITED
PARTNER in a LIMITED PARTNERSHIP, has personal liability
for the debts, taxes, and other claims against the
partnership.  If the partnership's assets are not sufficient
to pay creditors, the creditors can satisfy their claims
out of the individual partners' personal assets.  In
addition, when a partner fails to pay personal debts, the
partnership's business may be disrupted if his creditors
seek to satisfy their claims out of his interest in the
partnership, by seeking what is called a "charging order"
(in some states) against the partnership assets.

While a partnership must file federal and usually state
information returns (Form 1065 is the federal return), it
generally pays no income tax.  Instead, it reports each
partner's share of income or loss, tax credits, etc. on the
information return, and each partner reports the income or
loss on Schedule E of his or her individual tax return.
@CODE: CA
The California partnership tax return form is Form 565,
and is very similar to the federal 1065.
@CODE:OF
@CODE: MI
Note that the Michigan Single Business Tax DOES apply to
the partnership as an entity, however.  In addition, the
taxable income of the partnership must also be reported by
the partners on their Michigan individual income tax returns.
@CODE:OF
@CODE: DC
Note that business income of a partnership or of a sole
proprietorship is NOT generally reported on the individual
partner or proprietor's D.C.  income tax return, but is
instead separately taxable under the D.C. Unincorporated
Business Franchise Tax (Form D-30) at a tax rate of 9.975%.
@CODE:OF
@CODE: NH
However, there is also an 8% Business Profits Tax, similar
to an income tax, on all business entities, incorporated
or otherwise, with over $12,000 of gross income.  The tax
rate dropped to 7.5% for fiscal year 1994, and to 7% for
fiscal year 1995.

Recent legislation also created a new "Business Enterprise
Tax" at the rate of 0.25% of the taxable "enterprise value
tax base" (which is essentially the sum of all compensation,
interest and dividends paid or accrued by a business
enterprise), effective July 1, 1993.  Annual returns are
required for every business enterprise that has gross
business receipts over $100,000 during a taxable period
and whose "enterprise value tax base" is greater than
$50,000.  This new "Business Enterprise Tax" is allowed
dollar-for-dollar as a tax credit against the Business
Profits Tax.  (However, it will still catch many small
businesses and professionals who are not subject to the
Business Profits Tax.)
@CODE:OF

In addition, since 1985, partnerships have been required to
file a report with the IRS (Form 8308) regarding so-called
"hot assets" each time a sale or exchange of an interest in
the partnership occurs.

Like a sole proprietor, a partner is not generally considered
an employee of the partnership for income tax and payroll
tax purposes.  The income tax advantages and disadvantages
of a sole proprietorship also are equally applicable to a
partnership, since a partner's share of income from a
partnership is treated essentially the same as income from
a sole proprietorship.  For example, a partner's income
from a partnership may be subject to self-employment tax,
but not federal or state payroll taxes.

Unless a partnership agreement provides otherwise, a
partnership usually terminates when any partner dies or
withdraws from the partnership.  This is in contrast to a
corporation, which theoretically has perpetual existence.
Bankruptcy of a partner or the partnership itself will
cause the dissolution of the partnership regardless of any
agreement, under the laws of most states.  Note that for
federal income tax purposes that a partnership is deemed to
terminate for tax purposes if there is a 50% (or more)
change in ownership interest in the partnership in any
12-month period.  This can have important tax ramifications
(mostly negative ones) and is therefore a potential tax
trap for the unwary or the unsophisticated.

@IF116xx]In light of the fact that your business is conducted in the
@IF116xx]form of a partnership, you need to be sure to check with a
@IF116xx]competent tax adviser before any changes ownership occur in
@IF116xx]your partnership, @NAME.

@IF113xx]Even though your business is an LLC, and not a a partnership,
@IF113xx]you need to be sure to check with a competent tax adviser
@IF113xx]before any changes of ownership occur, since, as it is an
@IF113xx]LLC, @NAME may be taxed as a partnership.

Note that nearly all states now allow most partnerships to
become "limited liability partnerships" (LLPs), which
generally have the same limited liability for the owners
as corporations.  Generally, all that is required is to
register with the state to become an LLP and pay a fee to
the appropriate state agency.  You won't need to file any
articles of organization, unlike a limited liability
company (LLC), and will generally be able to continue to
operate under your existing partnership agreement, although
some changes in the agreement may be necessary to make
sure you do not lose any of your limited liability
protection.  For example, if your partnership agreement
requires partners with negative capital accounts to
contribute money to the partnership to eliminate such
negative amounts, creditors might be able to rely on such
a provision to negate the limited liability status of your
LLP.