Choosing to enter into a business partnership is an important decision. The following is some basic information you may find helpful.
Of all the various forms of business, partnerships are one of the most common. In most states, partnerships can be formed simply by two people agreeing to work together for a profit; these businesses can often be formed almost unintentionally. However, most partnerships are started after the parties enter into a written contract called a “partnership agreement”. This agreement sets down in writing the terms and conditions of the business partnership.
Depending on the state you live in, different rules apply to how and when business partnerships can be started. The simplest way to form a partnership is to draft and execute a business partnership agreement and comply with any specific filing requirements and fees your state may have. Like the formation of a corporation or other entity, a business partnership is a legally recognized business entity.
The three main types of business partnerships are:
- General partnership
- Limited partnership
- Limited Liability Partnership (LLP)
Each type of partnership has certain advantages and disadvantages about taxation and legal liability. However, all partnerships are governed by a partnership agreement if one is drafted. This agreement describes and conveys to each member certain rights and obligations. If you fail to meet those obligations, you may be subject to legal and tax liabilities.
A partnership agreement is the foundation of a business partnership and should contain certain information and provisions. Most business partnership agreements will contain provisions for some or all the following categories:
- Partners equity invested
- Allocation of profit and losses
- Purpose of partnership
- Reimbursement of expenses
- Duties and authority of the partners
- Admitting new partners
- Pay and compensation of partners
- Power of attorney
- Borrowing funds
- Dispute resolution
- Dissolution of partnership
Before making a decision on the type of partnership to form, I strongly suggest you consult with a good business attorney and CPA. The legal and tax liabilities vary considerably between the different types of business partnerships. A qualified professional will help you make the right decision.