Intellectual capital

Great partners often have knowledge, experiences, and skills that their counterparts don’t have. As a team, they have a solid understanding of what needs to happen in every part of their business. Plus, they excel at seeing those plans through.

Financial capital

Great partners have access to cash or ways to acquire funding. They have a good credit score (at least 650), which is a must for taking out term loans, asset-backed loans, or SBA loans to finance the acquisition, purchase inventory, or fund the business’s operations.

Human capital

Great partners are willing to put in the work that’s needed to make the business a success. Depending on the arrangement, partners may take a hands-on or hands-off approach. In either case, they’re willing to contribute when and how they’re needed.

General partnership

How it's formed:

• General partnerships are formed with a partnership agreement. This agreement should be drafted by an attorney and signed by every ownership partner.

What's great about this setup:

• Each partner shares in the responsibility of running the business.
• The partners can pool their strengths, resources, and connections to support the business.
• It’s possible that the partners would have better access to loans with favorable terms because of the strength of their combined credit ratings.
• Partnerships avoid the double taxation that impacts other ownership arrangements. Business profits and losses are reported on the partners’ personal tax returns.
• The ability to allocate losses to owner partners can increase the business’s internal rate of return on investment. It may also afford the partners some income tax benefits.

The drawbacks:

• Each partner is personally responsible for the business’s taxes, debts, and claims against the partnership.
• Each partner is liable for other partner(s)’ debts.
• Creditors can seize any partner’s personal assets to reclaim debts.
• Each partner can commit the business and other owners to obligations without signed consent.

Limited partnership

How it's formed:

• Like a general partnership, limited partnerships also require a partnership agreement. This agreement should be drafted by an attorney and signed by every ownership partner.

What's great about this setup:

• As a general partner, you can raise the capital you need for acquisition without giving others a say in its daily operations.
• You can repay the investments your partners make in the business on terms you both agree to (such as when the business has a certain amount of excess profits) rather than at fixed intervals of time.
• Partnerships avoid the double taxation that impacts other ownership arrangements. Business profits and losses are reported on the partners’ personal tax returns.
• The ability to allocate losses to owner partners can increase the business’s internal rate of return on investment. It may also afford the partners some income tax benefits.

The drawbacks:

• You, as the general partner, are responsible for the entirety of managing the business.
• You bear full responsibility for the business’s debts, taxes, and claims.
• Creditors can seize your personal assets to reclaim debts.

C Corporation

How it's formed:

• Owners file Articles of Incorporation with their state and pay a filing fee.

What's great about this setup:

• In many cases, creditors cannot seize your personal assets to reclaim debts.
• You may offer shares to as many individuals or entities as you like, and they do not have to reside in the United States.
• You can offer multiple classes of stock to suit investor preferences.
• Your company’s shareholders can sell and transfer their shares freely.
• You may be able to deduct all of your business’s charitable contributions and donations, provided that they don’t exceed 10% of your company’s income, as well as some benefits, including health insurance.
• Recent tax reform policies may allow you to pay a lower corporate tax rate than the maximum rate that’s currently in place for individuals.

The drawbacks:

• Because the business must pay tax on its earnings and the shareholders must pay tax on their dividends, the corporation’s earnings are taxed twice.
• The rules for corporations are strict and complicated.
• The costs of running a business as a C corp are higher than in some of the other arrangements.
• You'll need extensive documentation to establish this type of business.

S Corporation

How it's formed:

• Owners file Articles of Incorporation with their state and pay a filing fee, and they file Form 2553 with the IRS.

What's great about this setup:

• In many cases, creditors cannot seize your personal assets to reclaim business debts.
• You and other shareholders don’t have to pay a corporate-level income tax.
• Because of the Tax Cuts and Jobs Act (2017), you and other shareholders may be able to deduct up to 20% of your net qualified business income.
• Your business’s losses will pass through to its shareholders, who may be able to use the losses to offset income.

The drawbacks:

• Because your business is limited to 100 shareholders, you may have difficulty raising large amounts of capital.
• The shareholders of your business cannot be entities, so you won’t be able to raise capital from venture capitalists or private equity funds.
• You will likely need to limit your shareholders’ ability to sell or transfer their shares to ensure that shares aren’t given to an ineligible shareholder, a move that could terminate your S corp status.
• Your shareholders will be taxed on the business’s profits, even if income isn’t distributed to them as cash.

Limited liability company

How it's formed:

• Owners file Articles of Organization with their state and pay a filing fee.

What's great about this setup:

• In many cases, creditors cannot seize your personal assets to reclaim business debts.
• LLCs avoid the double taxation that impacts other ownership arrangements. Business profits and losses are reported on the owners’ personal tax returns.
• The ability to allocate losses to owner partners can increase the business’s internal rate of return on investment. It may also afford the owners some income tax benefits.

The drawbacks:

• Your company cannot issue stock.
• Some small businesses are ineligible to form an LLC. Certain states exclude banking or insurance businesses, accounting firms, architecture firms, and medical practices, among others.