Different Ways of Structuring A Partnership

Strategic partnerships have become an increasingly important and viable option for starting your new business. Partnerships make up about 7% of the business world and offer many benefits, but structuring a detailed partnership agreement can be challenging without the proper tools. You should definitely start by looking at an example of a partnership agreement.

What Is A Partnership?

Partnerships are a type of business model that include two or more people as the creators of the company. If you don’t want to start a business venture on your own with a sole proprietorship and don’t have the investment capital for a corporation, then a partnership might be the right business model for you.

There are three different types of partnerships that are recognized by most states as legal entities; it’s essential to know which category your business falls into before drawing up your partnership agreement.

General Partnership

Whether there are two partners or twenty in your business, a general partnership agreement gives each partner an equal amount of control and responsibility. It’s important to note that general partnerships have unlimited liability, meaning that if the business fails or debts need to be paid off, each partner is equally liable and must pay off debts by any means necessary.

It isn’t uncommon for partners in a general partnership agreement to sell off their personal possessions in order to cover business debts if the business fails. Because of this, it can be beneficial to have numerous partners in your general partnership agreement.

Limited Partnership

A limited partnership functions much more closely to a sole proprietorship in that it may function with only a single general partner. Any partner in this type of agreement who is not a general partner is known as a limited partner. Limited partners exert no control over the business; however, they do benefit from limited liability and can only lose what they’ve invested.

Limited Liability Partnership

A limited liability partnership is a much newer type of agreement and may not be available to all people starting a company or in all states. These agreements protect each partner within the agreement from personal liability due to another partner’s mistakes or poor business decisions. Generally, only professionals are able to register as limited liability partnerships.

Small Business Partnership

For small businesses who aren’t yet ready to legally register as a business but still wish for their agreements to be legally binding up until that point, small business partnerships are the perfect solution. This establishes important information, as well as the responsibilities and expectations of each partner before they develop into a proper business.

Key Things To Include In A Partnership Agreement

There are a number of things that need to be solidified immediately in your partnership agreement, as omitting them could lead to drastic consequences within your company.

The Number Of Partners

Partnerships are designed in a way that allows any number of people to be a general or limited partner. When you launch your business, you should establish not only the current partners but any maximum limit that you want on the number of partners in the future. While many partners can be advantageous, especially with liability, it could impact operations.

Investments

Your partnership agreement should clearly state how much has been initially invested by each partner. This may impact the ownership percentages of the business or how much each partner contributes towards the distribution of any profits or losses. Many partnership agreements have an uneven amount of liability, often determined by these investments.

Management

Management strategies are generally outlined in a partnership agreement to keep a business consistent and retain the original vision for the company. Often, partnerships will choose somebody to act as a managing partner to control the direction of the business. In many cases, managing partners may change if enough partners vote for a different managing partner.

When Partners Leave

Even if all current partners agree to give their all to the business, it should be clarified as soon as the company launches what will happen if a partner decides to leave. Similarly, it should be established what’s going to happen if the company dissolves. Clauses may indicate a return on investment or sharing in profits or losses, in either case.

How Do I Structure The Agreement

Structures can change depending on the agreement, but generally, it will follow a standard order of the presented information; the business name, the owners/partners, the date of establishment, the investments, monetary/liability distribution, management, taxation, and finally leavers.

Many individual clauses are likely to be added to each section; however, by following this basic format, you’ll be able to establish a good partnership agreement.

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