What You Need to know about forming a Business Partnership
Why a Business Partner Might Make Sense
A partnership is one of the four general ways you can choose to organize your business.
As John D. Rockefeller once said, "It's better to have a friendship based on a business partnership than a business partnership based on a friendship."
That is why it is important for a partnership to follow good business principles.
Just What is a Partnership?
A partnership is a business jointly owned by two or more individuals. Each of the individuals is personally liable for the debts of the partnership.
Partnerships can be formed with a handshake - and often they are.
In fact, partnerships are the only business entities that can be formed by oral agreement.
Of course, as with any important legal relationship, oral agreements often lead to misunderstandings, which often lead to disputes.
That is why you should only form a partnership that is created with a written partnership agreement.
General or Limited Partnership - You Decide
The first kind of partnership is a general partnership. A general partnership does not have to register with the state and no legal agreement is necessary, though as we stated earlier, is highly recommended.
For general partnerships, each of the partners, know as general partners:
- May or may not invest
- Help run the company
- Are liable for all debts
- Share equally in the profits and shares as well as losses
- Must consent in the sales of assets
When you form a partnership, you are considered co-owners with your partner/partners and are taxed according to your share of the partnership profits.
The other form of partnership is the limited partnership (LP). A limited partnership has both general partners and limited partners, but must have one or more general partners.
As with general partnerships, general partners run the business and are liable for partnership debts.
A limited partner, on the other hand:
- Invests
- Does not participate in the running of the business
- Is liable only up to the amount of their investment
A limited partnership must have at least 2 different partners and must file their partnership with the state.
Partnerships and Capital Needs
The advantages to a partnership are similar to a sole proprietorship.
One additional benefit is that a partnership allows for additional capital and management resources since more than one person is contributing to the company.
Other advantages include:
- Low costs, paperwork, and state registrations
- No double income taxes
Liabilities Come With Partnerships
The biggest disadvantage of a partnership is the same as a sole proprietorship, which is liability.
However, there is added liability in a partnership because you will be liable for your partners actions and debts as well as your own.
Other disadvantages include:
- Any partner can make a decision without the other and that decision is binding
- Contributions to the partnership become part of the partnership and are shared equally, even if one partner contributes more.
Forming a partnership can be a real benefit for your business. However, forming a partnership can be complicated as you form the best agreements possible.
To make sure you have the best chance of success as a partnership, you should strongly consider consulting with an experienced business attorney before opening for business.
More About Business Partnerships
Next Page:
Forming a Corporation - The Preferred Choice for Liability and Taxes
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