If your business will have several owners, you’ll want to consider creating a partnership. These come in two varieties: general partnerships and limited partnerships.
In a general partnership, the partners manage the company and assume the responsibility for the debts and obligations according to the percentage of ownership outlined in the partnership agreement. If you have a business where there are both active owners and individuals who are investors only and have no control over the company, you may want to form a limited partnership instead, which provides specific protections to the investors in terms of liability.
One of the major tax advantages with a partnership is that taxes aren’t paid by the business. Profits and losses are passed through to the partners on their individual tax returns. Taxes are reported on the Schedule K-1 form, which indicates his or her share of partnership income, applicable deductions and tax credits. A separate form, Form 1065, is used to compute income.
There are a couple of drawbacks to a partnership. First, the partners are liable for all obligations and debts as a percent of ownership as articulated in the partnership agreement. In addition, each individual partner can act on behalf of others in the partnership, including making business decisions and taking out loans.