Fritz: All Fritz/All Fritz.zip/All Fritz/FILES/BUSITION/SBA.LZH/FSBA.EXE/F111.SBE

Text File | 1992-12-01 | 6KB | 133 lines

@091 CHAP 2

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

       "And the lion and the calf shall lie down together,
        but the calf won't get much sleep." -- Woody Allen

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 agree-
ment 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 When and how will profits be withdrawn from the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?


A written partnership agreement should be prepared by an
attorney and, if possible, should be reviewed by a tax ac-
countant 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, partner-
ships 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 part-
nership.  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 addi-
tion, 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 in-
formation 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 re-
turns.
@CODE:OF
@CODE: DC
Note that business income of a partnership or sole proprie-
torship 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 10.5% (10.25%
for periods ending after September 30, 1992).
@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 consid-
ered an employee of the partnership for income tax and pay-
roll tax purposes.  The income tax advantages and disadvan-
tages 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 part-
nership usually terminates when any partner dies or with-
draws 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.