Disadvantages and Tax Consequences of Partnerships - Essay Example

Essay: Finance and accounting Disadvantages and tax consequences of partnerships Whereas partnerships are some of the most popular and simplest form of startups, the businesses usually come with their own disadvantages which include; first and foremost the liability of a partnership is unlimited implying that if the enterprise as a whole becomes insolvent and indebted, the personal assets of the partners may be attached to take care of the debts. Secondly, a partnership is usually very unstable and is dissolved immediately one of the parties retires, dies, resigns or even is declared bankrupt.

Thirdly, a partnership has unclear authority which is another drawback facing informal partnerships (Schneeman, 2013). A conventional partnership usually has authority distributed equally between the partners, and thus, no hierarchy of authority exists. Consequently, all partners may act on behalf of the business and may enter into various contracts thus binding the partnership into agreements that are not wanted. Finally, transferability is another disadvantage of partnership. Thus one partner cannot transfer his/her stake to another individual without the prior approval of the other remaining stakeholders.

Such inflexibility is particularly undesirable when the partners have existing disagreements amongst themselves (Schneeman, 2013). A partnership has some tax benefits in comparison to other different business entities. Thus, for example, loss or income distribution or allocation should be proportional to the ownership stakes of the stakeholders of a given corporation, whereas for a partnership, it may allocate cash flow or income amongst the partners that suits them best. In addition, a partnership allows resource pooling, needs basic filling requirements, avoids double taxation like that of corporate profits together with being reasonably easy to suspend operations.

A partnership can therefore liquidate tax-free, but a corporation is usually taxed at the entity point whenever it liquidates. The other tax break for a limited partnership concerns limited partners. Normally, general partners usually pay self-employment taxes since they are involved actively in the daily running of their business operations. Thus, self-employment taxation comprises of Medicare and Social Security taxes put together and normally accounts for 15.3% of the total income of a partner as of 2013.

It is important to note that a limited partner who does not take part in the operation of the business is not entitled to self-employment taxation (Daily & Quinn,2013). References Daily,F.& Quinn,J. (2013). Tax Savvy for Small Business. New York,NY: Nolo. Schneeman, A. (2013). The Law of Corporations and Other Business Organizations. New York,NY: Cengage Learning.