By: First Union
What is a Business Partnership?
When it comes to a business partnership, generally two or more people will come together to run a company. The partners will share in the profits and losses that the business incurs. That said, there are a few different types of partnerships that you can establish as far as starting and managing a business. In this article, we look at the different kinds of partnerships that exist as well as some of the benefits of each.
When forming a business partnership, two or more people will draw up a legal agreement that stipulates the terms under which they will establish and run the company in question. Each partner will usually invest in the company and then the profits will be shared accordingly. Any losses sustained will also be the shared responsibility of the partners.
The Basics of a Partnership
Unlike a corporation, a partnership is not separate from the owners. That is to say, the owners of the business will have personal liability where the company is concerned. In this sense, a partnership is more like a sole proprietorship. As far as taxes go, the partnership itself is not taxed. The partners are taxed personally once the profits have been divided; their income is thus what gets taxed.
Different Types of Partnerships
One of the main decisions associated with creating a partnership is deciding what kind of partnership you are going to establish. There are three primary types of business partnerships:
- A general partnership is when the partners involved run the day to day business operations. They are also personally responsible for business debts and liabilities.
- A limited partnership will have one partner engaged in the daily activities of the company; that partner is liable for business debts and legal issues. Another partner will generally not participate in the business and also will not have any liability.
- A limited liability partnership gives legal liability to all partners involved with the business. The partners are therefore protected from both business liability as well as liability from the other partners.
What Kinds of Partners are in a Business Partnership?
A partnership is not necessarily just comprised of individuals. Partners can also be companies or groups of individuals.
- General partners as noted, are those who actively engage in the day to day of business activities. They also have liability for any debt and legal issues that arise in the context of the partnership.
- A limited partner will not usually participate in company operations. They also do not have any liability as far as any personal responsibility for the company.
- Partnerships can also have different levels of partners. Some organizations for example have both senior and junior partners. As such, the various types of partners will have different levels of investment in the business as well as different responsibilities and duties.
How is a Business Partnership Different from an LLC?
A limited liability company is very often set up much like a partnership. As far as taxation purposes, an LLC is treated as a partnership would be. That said, an LLC differs in that the members of the LLC are not personally liable for the company's debts and obligations. In a limited partnership, some of the partners are shielded, but general partners are not.
When Setting Up a Business Partnership
As is the case in establishing several business entities, with a partnership you will usually register with the state. The actual process and associated fees will vary from state to state. The process will involve coming up with a partnership agreement that lays out all relevant details. So for example, the agreement may state how much each partner is contributing, the roles of the partners involved, as well as how much will be distributed to the partners as far as profits, and how losses will be managed to this end.
One of the main components of a good partnership agreement is the description of how decisions will be made. And consequently, if there are any disagreements, how any such disputes will be resolved. This is so important to determine ahead of time, before actually launching the business. Vagueness in terms of decision-making power can lead to tensions and ultimately even, sabotage the company before it gets off the ground. Your agreement should also answer the "what if" questions. If for instance, a partner eventually decides to leave the partnership how will this be handled? There should be stipulations in place for this scenario as well as several others that can invariably arise. Ideally, partners should enlist the help of an attorney experienced in these matters when drafting any such agreement.
If You Join an Existing Partnership
Even after the partnership has been established, individuals can join that partnership. Most often, the new partner will be bringing money into the deal. It will then need to be determined, much as was done with the original partnership agreement, how much liability the new partner will have and what their distributive share of profits and losses will be, among other key factors.
Paying the Partners
As they are not employees but rather owners of the company, the partners usually will not get a regular paycheck. Instead, they will each receive their allotted share of the profits/losses. This will have been predetermined in the agreement as far as how much each gets; they will then each be taxed individually on this income.
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