Deciding to go into business for yourself is a major decision on its own — but deciding to join forces with a partner is a completely different ballpark. If you’re thinking about starting a business with a partner, consider structuring your business as a general partnership.
General partnerships are one of the most common legal business entities, granting ownership to two or more people who share all assets, profits and liabilities. In a general partnership, it’s important to understand that each person is responsible for the business and is liable for the actions of their partner(s). To help avoid any issues with your partners throughout your business journey, you’ll want to write a partnership agreement before moving forward.
[Read: What Is a General Partnership?]
What is a partnership agreement, and why do you need one?
that, because you and your partners are equally responsible for the business, as well as the outcomes of one another’s decisions, creating a partnership agreement is a great way to structure your relationship with your partners to best suit your business.
Partnership agreements are a protective measure to ensure any and all disagreements can be resolved quickly and fairly, and to understand what to do in the event that the partners wish to dissolve the working relationship or business in its entirety.
What should be in a partnership agreement?
Your partnership agreement needs to cover a lot of ground. According to Investopedia, the document should include the following:
- Name of your partnership. While it may seem like common sense, one of the first things you and your partner(s) must agree on is the name of your business.
- Contributions to the partnership and percentage of ownership. Create a list of specific contributions you and your partner(s) will make to the business. In addition to contributions, you must decide on the percentage of ownership, which is typically dictated by each partner’s contributions to the business.
- Division of profits, losses and draws. You and your partner must decide how to divide the business’s profits, losses, and draws. Partners can agree to share the profits and losses in accordance with their percentage of ownership, or they can be distributed equally among the partners regardless of ownership stake.
- Partners’ authority. Partnership authority, also known as binding power, should be defined within the partnership agreement. The ability to bind the business to a debt or a contractual agreement can expose the business to unnecessary risk, which is why the partnership agreement should explicitly state which partner(s) have binding authority.
- Withdrawal or death of a partner. While no one wants to consider the possibility of a partner’s withdrawal or untimely death on the brink of launching a new business, this is something that needs to be clearly stated in the partnership agreement. The agreement should also outline the valuation process for the business and/or any requirements for maintaining a life insurance policy designating the other partner(s) as the beneficiaries.
To avoid conflict and maintain trust between you and your partner(s), be sure to discuss all business goals, the commitment level of each partner and salaries prior to signing the agreement.
How do you structure a 50/50 partnership?
- Discuss/agree on important details before drafting. Structuring a 50/50 partnership requires consent, input, and trust from all business partners. To avoid conflict and maintain trust between you and your partner(s), be sure to discuss all business goals, the commitment level of each partner, and salaries prior to signing the agreement.
- Consult with an attorney. Before you draft or sign a partnership agreement, consult with an experienced business attorney to ensure everyone’s investment in the partnership and business is protected.
- Provide both partners with equal access to all fixed assets. When running your business, you and your business partner will have separate roles and responsibilities but complete and equal access to all fixed assets, including any property and equipment you’ve invested in. Including this detail in your business partnership agreement will help ensure total transparency and trust between you and your partner.
- Include a dispute resolution process. With responsibility for the business split between two partners and the high cost of taking legal action, you should include an official dispute resolution process in your partnership agreement to help navigate arguments.
- Determine how you both will be paid. Your partnership agreement should outline reasonable salary expectations for yourself and your partner. Everyone, investors included, should agree to the terms before finalizing the partnership.
Advantages of a partnership
Some of the several advantages of a general partnership include the following:
Easy to establish
Establishing a partnership is simpler and more straightforward than other business structures. Once you’ve drafted a partnership agreement, all partners must agree to the terms listed and sign the document. And unlike other business entities, you don’t have to file federal paperwork — you simply need to file a few documents locally, like a trade name application and partnership authority.
Easy to dissolve
Partnerships can be as easy to dissolve as they are to establish. If all partners agree to dissolve the partnership amicably, refer to the dissolution clause in your partnership agreement and follow the terms outlined. Additionally, you must consult your state’s laws regarding partnership dissolutions, and you may need to file a statement of dissolution. If you and your partners don’t decide to dissolve the partnership amicably, that could complicate the process, especially if legal action is necessary.
Simplifies your taxes
With partnerships, you don’t have to file additional business entity taxes. Your taxes for the business will pass through to the business owners, which means you’ll need to include your share of the business profits and losses in your individual taxes. You’ll also be responsible for paying any additional taxes individually.
Involves extra help and knowledge
Business owners have to play multiple roles, but when you have a business partner to rely on, you can cover more ground than if you were trying to tackle everything alone. A business partner also brings their business expertise to the company, which could differ from your own knowledge and experience. Ideally, your partner has skills and expertise that complement and enhance your own.
Carries less of a financial burden
Rather than taking on the heavy financial responsibility of starting a business alone, your business partner can help ease some of the financial strain. Having a partner to help cover hefty startup costs can be a massive relief to business owners, with the added benefit of possibly being able to invest more upfront or avoid racking up large sums of debt since you’re splitting the responsibility of covering those costs.
Disadvantages of a partnership
Partnerships also come with a few disadvantages, including the following:
Doesn’t protect partners’ personal assets and involves no separation from the business
Unlike other business structures, a partnership does not create a separate legal entity from you and the company or from you and your partner. You are liable for any legal or financial difficulties your business may face. Your personal assets could be at risk since they are not covered by the partnership agreement.
When starting a partnership, you are legally and financially responsible for your partner and the business. If your partner creates legal trouble for the company, you become liable and open to legal prosecution as well. Not only can this strain your relationship with your business partner, but it also affects your personal finances because, as mentioned above, there’s no legal separation from the business unless you dissolve the partnership.
Provides less independence
Unless explicitly stated in your partnership agreement, your partner has an equal say in all business decisions. If you and your business partner disagree on some of the most fundamental decisions regarding your business, such as expansion opportunities, bringing on a management team, or selling the business, this could cause disagreements between you and your partner, hinder your professional growth, or jeopardize the company.
Requires you to split profits
Having a partner means there’s someone to help cover the business’s costs, but that also means you’ll need to split the profits with them. If you have multiple partners, you could be looking at a significantly smaller profit margin than if you started the business alone.
This story was updated by Julianna Lopez.
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