Which type of partnership is the right structure for my business?

In our continuing series on the various tax structures business owners can choose from in this post we will look at the three main types of partnerships and the pros and cons of each.

What is a General Partnership?

A General Partnership is an entity formed by two or more individuals to conduct business or trade. Each partner brings to the table, capitol, labor, skill sets and expertise and each partner shares in both profits and losses associated with the business. Each partner is liable for the business related actions of themselves and the other partners. Income and losses from the partnership must be reported on each partner’s personal income tax return.

Pros of a General Partnership

Simple to set up - A General Partnership does not require a state filing. The Partnership is created when the two entities begin to do business.

Inexpensive to create - While the business entity must obtain any licenses or permits required for the type of business being conducted, under a General Partnership there is no state formation filing hence no formation fee nor ongoing additional state fees or franchise taxes. 

Few organizational requirements - It is advisable for individuals entering into General Partnership to create a framework for how the partnership will be managed and dissolved, but unlike a corporation it is not required. Under a General Partnership there are no annual meeting requirements or issuance of partner interests.

Tax Benefits - Profit and loss sharing by partners may decrease each individuals annual tax burden.

Cons of a General Partnership

Financial Liability- All the partners are personally liable for company debts. All the partner’s personal assets can be seized to pay company debts or satisfy judgments resulting from litigation against the company. All partners are liable for the actions of one another in the course of doing business.

What is a Limited Partnership?

Limited Partnership requires only one individual to act as a General Partner and allows one or more individuals to be Limited Partners. Under this structure at least one General Partner has unlimited liability and the Limited Partners are usually liable only for the amount invested in the business, however this varies by jurisdiction. Limited Partners typically are not involved in the day-to-day management and operation of the business and function much like a silent partner. Limited Partnership structures are beneficial to transient and short-term projects like film production, real estate transactions and estate tax filings. 

Pros of a Limited Partnership

Access to Capitol - The General Partner(s) can generate capitol by bringing in additional Limited Partners.

Retention of Control - Limited Partners are not decision makers, they do not vote or have any authority in the operations or dealings of the business. Limited Partners can be replaced without dissolving the partnership. 

Personal Asset Protection - Limited Partner’s liability is limited to the registered amount invested in the business.

Pass Through Taxation- Limited Partnership’s must file a tax return showing the firms profits, losses, and payments to investors. However, the actual tax burden is not paid by the Limited Partnership but is “passed through” to the General Partner(s) personal income tax burden. 

Cons of a Limited Partnership

Set-up Requirements - Because Limited Partners are essentially investors Limited Partnerships must adhere to the compliancy standards of their jurisdiction. The entity must create a Partnership Agreement in the county where they do business and they must hold annual meetings. 

Liability for General Partners - There is a greater risk to General Partners because they are personally liable for all debts and taxes associated with the firm. Their personal assets can be seized to satisfy debts. If the company goes into bankruptcy or is sued the General Partners are wholly liable.

What is a Limited Liability Partnership?

A Limited Liability Partnership is basically the same as a General Partnership except partners have the benefit of some personal liability protection. Typically a partner is only liable for his or her negligence or malpractice and or the actions of employees under their direct supervision.

Pros of a Limited Liability Partnership

Paperwork and Formal Requirements- Like the other partnership structures a Limited Liability Partnership has fewer restrictions and annual requirements than a corporation.

Flexible Framework - Partners have more flexibility in determining which partners are responsible for each aspect of the day-to-day management and operations of the firm. 

Pass Through Taxation - Like General and Limited a Limited Liability Partnership’s tax burden is passed through to the General Partners tax liability and profits and losses are reported on the General Partners individual income tax return.

Simple Conversion - A Limited Liability Partnership is typically easier to convert to from a General Partnership than to a Limited Liability Company or Corporation.

Partnership Protection - Limited Liability Partners are generally not personally liable for company debts.

Cons of a Limited Liability Partnership

Set-up and Fees - Limited Liability Partnerships must pay a state fee based on how many partners are invested in the firm. In some states Limited Partnerships are only available to certain types of businesses like Accounting and Law firms.

Liability for Limited Partners - Limited Partners are liable for their actions and the actions of employees under their supervision. If a Limited Liability Partner engages in the day-to-day operations and management of the company, they can loose their limited liability protection and in a sense become a General Partner.

Regardless of which type of business entity you choose it is advisable for new business owners and entrepreneurs to get professional advice on how best to move forward in setting up shop. Tom Bulger, CPA can help you determine which tax structure is right for your new venture and the best way to move through the process. Tom Bulger has been helping to create successful small businesses for over 25 years. Give Tom Bulger a call today.

Happy Employees Bring a Good Return on Investment

Small business owners are always looking for a good return on investment to help grow their business. Is a new POS system worth the cost? Should we increase our advertising budgets? What demographics are we missing in our social networking campaigns.

However, one of the most important assets in any business is human resources. Business owners often overlook the incredible ROI that can be achieved by creating a happy, healthy workplace.

According to a study by SHRM, the Society for Human Resource Management, when factoring in all costs like reduced productivity, recruiting, interviewing, hiring and training it costs an average of $3,500.00 to replace one $8.00 per hour employee.

Many business owners don't realize the high cost of employee turnover on their bottom line...

• Replacing an entry-level employee cost your business 30-50% of that employee's annual salary
• For mid-level employees its 150% of their salary
• High level or specialized worker replacement costs a whopping 400% of their salary

Some employee turnover is inevitable and even desirable to bring in fresh energy and new perspectives or replace under performing employees with more skilled and productive ones. But beyond the normal flow of unavoidable turnover there are many simple solutions to ensure a high rate of good employee retention.

Design a comprehensive employee training structure

Business owners can't expect employees to carry out the duties of their job with out proper training. In addition, ongoing education via seminars, webinars conferences and workshops increase the skills of your current employees instead of having to hire more talent. From the employee's perspective this demonstrates your commitment to them as a valued member of the team.

Know what your employees face on a daily basis

Small Business owners are busy and often away from their sales or production floor and have no idea of the challenges their employees have in day-to-day operations. Make yourself aware of all aspects of their job, in other words take a walk in their shoes. This practice will not only foment loyalty among staff but may alert you to issues that need your attention.

Recognize and reward even the routine and mundane

Everyone from the cleaning crew to your VP in charge needs to be recognized and rewarded for his or her good work. Employees are much more content when they can see the impact they have on the success of your business. No one wants to feel like their contributions are meaningless or unrecognized by their organization.

Provide incentives that matter

Perks are great, so long as your employees desire those perks. You may think offering a discount on merchandise is nice, but ultimately it benefits you as part of your employee's salary is going right back into your pocket. In addition to things like discounts try to offer incentives that are purely about rewarding them for their good work.

Be a good role model

Strong leadership is key to retaining your top performers and keeping them happy. When an employee goes above and beyond put them in a mentorship or supervisory role. In this capacity they help to create a culture of the behaviors you desire. They lead by example and have a positive effect on the entire workforce. Conversely, toxic or negative speech and attitudes from co-workers can send a top performer out the door. Take swift action to correct the undesired behavior before it creates a hostile work environment.

Think of your employees as valuable assets. Your investment in them will bring solid returns through increased productivity, and avoiding the high cost of turnover. Tom Bulger, CPA specializes in helping small business owners create leadership platforms that foster a strong happy workforce. Contact Tom for advice on how to successfully implement these practices into your small business.

Are you a small business owner or manager with high employee retention rates? What measures have you put in place to keep your staff happy? Share you comments below or post them on our Facebook page.

Finding the Right Partners to Advise Your Small Business

Successfully managing financial resources is important in both new and growing businesses. Developing and implementing a financial plan that will ensure the success of your business is just one area of your business that demands attention. 

How might your vision and results change with the input of an experienced professional? 

It sometimes feels a bit lonely at the top. Many responsibilities and days that are too short mean a lot of great intentions are left untouched and explored. 

What if a business advisor with business management insight joined your team make suggestions on growth opportunities and profitability?

Business advisors can help you step back from your business and look at the bigger picture your business is painting, identifying strengths, weaknesses, opportunities and threats that you may have overlooked or are just too close to see. 

What if that business adviser was a Certified Public Accountant?

Not all CPAs are comfortable advising you on business strategy and growth. Most feel very comfortable in the complex world of taxes, payroll and bookkeeping – but few have the experience or desire to advise business owners in taking their companies to the next level. 

• Looking at your numbers and results, your accountant is trying to help you pay the least amount of taxes.
• A business adviser should be helping you create and monitor systems that earn you the most return on your investment.

Your revenue numbers and taxes have competing goals and objectives (not many folks are in business to pay the most amount of taxes) – perhaps 2 professionals are in order to create the perfect plan for your business.

Tom will work you, your team and current CPA to find the path to growth that meets your objectives.