Partnership Accounting

If your business will be owned and operated by several individuals, you’ll want to take a look at structuring your business as a partnership.

Tax treatment of a partnership can be looked upon with benefits and disadvantages. The benefit in a partnership is that losses will be distributed to the partners and as long as the loss rules are satisfied these losses can offset the individuals other taxable income. The disadvantage is that all profit must be distributed to the partners based on their ownership and tax is calculated based on the individual’s marginal tax rate which can be much higher than the rate of tax a company is liable for. As with the sole trader there is no asset protection with a partnership and further more if one of your partners becomes insolvent you will be liable for the full debt.

If you decide to structure your business as a partnership, you will need a partnership agreement that details how business decisions are made, how disputes are resolved and how to handle a buyout. You’ll be glad you have this agreement if for some reason you run into difficulties with one of the partners or if someone wants out of the partnership.