If two or more people own a business you must choose a more extensive business structure.  You may organize as a Partnership, Corporation or a Limited Liability Company.  If a partnership is chosen, most small businesses will be a General Partnership.  The first step is to create and sign a Partnership Agreement on how the partnership will operate.  As a partner in a general partnership, you would face the same unlimited personal liability as a sole proprietorship for both business and personal assets.  If one partner makes a partnership commitment, all partners are equally responsible. 

For taxes, expenses, fringe benefits, and retirement funds a partnership is similar to a sole proprietorship.  The partnership does not pay income taxes but does file an informational return showing income and each partner’s share.  Each partner then files income on their personal return, similar to a sole proprietor.  An alternative is a Limited Partnership, where a General Partner is appointed who has unlimited liability, and the other partners have limited liability.  This structure is often used for investment partnerships.

The Partnership structure offers advantages to the self-employed individual:

• Simple structure – easy to form, less paperwork and maintenance than a corporation
• Single taxation as an individual for partnership income
• Comparable expense deductions and retirement funding

Disadvantages of a Partnership are:

• Unlimited business and personal exposure
• Full FICA (Social Security) and Medicare taxes
• Limited flexibility

We explain all of these points in greater detail in additional subject matter below. Also review the options of a Limited Liability Company, a C corporation, and an S Corporation.

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