What is a Partnership? Is It the Right Structure for You?

The business partnership, the definition of which is two or more people sharing ownership in a single business, is quite similar to a sole proprietorship with similar benefits and drawbacks.

It can be arranged with just a verbal okay, but it is highly recommended that you and your associates consult an attorney and sign a mutually agreeable written agreement. This legal agreement should detail how decisions are to be made, how profits are to be shared, how work is shared and, if the need arises, how the business will be closed. The agreement should also cover how serious disputes are handled--perhaps through binding arbitration--so that it does not turn into a lengthy court battle that could bankrupt the company.

Partnership: It is Easy to Set UP

Although it is about as easy to set up as a sole proprietorship, this arrangement has more benefits. With more than one owner in the business, it is easier to get loans and raise funds to run and expand the business. The profits from the firm flow directly to the owners of the business and are declared on each owner’s tax return--no potential of double taxation as there is in a corporate structure. This form is typically able to attract a higher caliber of employee by offering the employee the possibility of becoming a partner and sharing in ownership down the road. This structure is most beneficial when the owners bring complementary skills to the table. For example, we interviewed the owners of a small but highly successful contracting firm (they just finished a $14 million home that includes a $2.5 million pool house!). One of the owners is truly gifted at customer service and selling jobs as well as accurately estimating projects. The other owner is skilled at managing and completing projects in a timely fashion.

The disadvantages of the structure are similar to those of a sole proprietorship. The biggest drawback of this form of company structure is the unlimited liability that each partner is subject to. If the business turns sour or the company is successfully sued, the partners are exposed to unlimited liability. Another disadvantage is that since profits and decisions are shared, there is an opportunity for disagreements. Other drawbacks are that employee benefits may not be fully deductible and this structure typically has a limited life being limited to the death or withdrawal of a partner.

Like the sole proprietorship, the name of the company needs to be carefully researched. Check with your lawyer who is working up an agreement about searching a name. Check with your county clerk and Google the name to see who else is using it. Check the availability of the name for your website. Check if the name has been trademarked by clicking on trademarks faq

This form of ownership can be structured differently including the general,and the limited partnership and the joint venture.


The Partnership: 9 Cautions and Caveats

  1. Do you really need a partner? A partner should bring something to the table that you lack--specific skills, experience or money. If the partner you are considering is a clone of you, perhaps you need to pass on the opportunity. Don't commit to a partner because you would be lonely in business by yourself. If you feel that way, keep your day job!
  2. Is your potential partner a time bomb? Is your potential partner seriously in debt; does he or she have serious marital problems; is he or she in poor health; does he or she have a criminal record? You need to check on these.
  3. Is your potential partner as committed to the "dream" as you? We've seen it time and again, one partner puts in 60%, 70% or 80% of the time, effort and creative power and the other one is along for the ride.
  4. Is your potential partner honest? It is not always easy to tell this one, but perhaps a background check is in order.
  5. Will your potential partner put everything in writing? Verbal agreements and handshakes don't cut it when it comes to a partnership
  6. How do you get out of the business if it is not working out for you? Many times, these partnerships end up in court. In your written agreement, include an arbitration clause to get you out of the situation with a minimum of cost and pain.
  7. If your potential partner dies or is disabled, you will in effect be in business with his or her husband or wife or their kids. How would that grab you? Create a buyout agreement for those situations.
  8. Is this business the primary interest of your potential partner, the way it is for you? Is there something going on in his or her life that would draw his attention elsewhere, such as a sick spouse, parent or child?
  9. What do others think of your potential partner? What kind of reputation does he or she have in your town?

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