Partnership Characteristics And Formation Essay

A partnership is a written agreement that shows the duties of each partner and how income will be distributed. There are many reasons for forming a partnership. One is additional capital. You may not want to go thru the hassle and regulations of incorporating, so you find someone(s) with needs matching your own. Another is access to credit markets. Forming a partnership shows you are serious about the business where operating as a sole proprietor could be interpreted as just a hobby. A third is the lack of skills needed to be successful. Each partner adds something of value not previously held. Finally and perhaps most importantly, is reducing liability. As a sole proprietor, you can be sued for all of your assets. Under a Limited Liability Company (LLC), only the assets in the partnership are at risk. The partnership serves as a pass thru entity. Income is not taxed. Instead, each partner reports their share of the profits on their individual tax returns.
Recently, another characteristic of partnerships has made the news. It comes as the result of the Panama Papers, which disclosed how global politicians hold assets in offshore shell companies set up by a Panamanian law firm. Anonymity of ownership isn’t something normally associated with partnerships. Many partnerships are set up in states like Nevada and Delaware to protect this anonymity. But in a liberal state like California that is cash strapped, this news isn’t going over very well. The legal separation between a business and personal assets has now come under scrutiny.
There have been accusations that these shell companies fund assets from illegal sources. That may or may not be true. But what right does the public have to know who is investing in what? The most logical reason is they want the government to have access and seize these assets, then redistribute to the public. Ownership stakes in partnerships are registered with states and in tax filings. But in this culture, that is not enough. Governments need to fund their budgets and keep promises they made for votes. Access to private property is a key source of revenue.
The Treasury Department may be willing to help. They are working on a rule that requires banks to know the identities of all owners of partnerships. The problem is banks don’t have access to state records. They can’t verify if the information they receive is accurate or not. Plus, the added expense of yet another regulation increases the cost of doing business.
States like California make it challenging to do business with high taxes and heavy regulations. Partnerships are formed to create synergies by bringing owners together with differing skills and talents. The benefits of privacy protection and limited liability are two main reasons for creating them. If states are continually allowed to violate rights of owners by obtaining personal information and making it public, the ability to operate will be severely hampered. A free market economy cannot operate in these situations. As a result, partnerships and other legal structures will disappear, as will the capital that funds them.