How to Succeed in Business: Ensure that Every Partnership Agreement is in Writing!
As a small business owner, there will come times when you will agree to do or go into business with others. During these times, you will build a strong business relationship with another business owner. With both of your combined resources, you will be able to get more work, increase your clientele, increase your revenue, and increase exposure to both of your businesses. The most common form of business relationships is a partnership.
What does a partnership entail?
- Two or more people own the business equally.
- Two or more people share ownership of the business together.
- All partners of the business contribute to all aspects of running it like labor, skill, money, or property.
- Also, each partner shares in the profit and loss of the business.
- Each partner shares equally in the decision-making process of the business.
Any business entity that one decides to set-up or enter into regarding their small business should be in writing. Regarding potential partnerships with other business owners, it is good to set-up the business in writing by way of a partnership agreement.
What should a partnership agreement include?
- Before put anything into writing, all parties involved should have a discussion of how the partnership will be set-up and what role each partner will play in the business.
- The agreement should be drafted by the partners with the help of the following parties:
- Attorney- to address any potential legal issues.
- Accountant- to address any possible financial and tax issues.
- Bank Representative- to address any potential banking issues.
- The agreement should detail how future business decisions will be made.
- Should include information on how partners will split dividends, profits, and losses.
- The agreement will detail how disputes among partners will be decided.
- The agreement should detail how to deal with change of ownership like new partners or buy out current partners.
- The agreement will provide conditions on how to dissolve the partnership.
What are the different types of partnerships?
- General Partnerships assume that profits, liability and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
- Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects.
- Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.
How to form a partnership?
- Ensure that all parties involved draft up a partnership agreement.
- Each party must ensure that they have the agreement reviewed by an attorney.
- Each partner must ensure that they understand all the terms of the partnership agreement.
- Ensure that the partnership is registered as a legal company with the local state in the Secretary of State Office.
- Must ensure that the partnership follows all the federal, state, and local laws regarding operations and tax issues.
- The partnership has to be registered with the IRS for tax purposes.
- Each partner must ensure that they have an accountant explain the tax consequences of the partnership.
When forming a partnership, just be very careful and wise when making the decision to do so.
Donya Zimmerman is a business consultant, mediator, and legal professional with over ten years of experience. She is owner of Family & Community Mediation and Business Consulting (FACMBC) based in Baltimore, Maryland and has been in business since 2013. Services provided by FACMBC: Mediation and Conflict Resolution Services; Business Registration Assistance (Limited Liability Company, Corporation, S-Corp, Limited Liability Partnership, etc.); Business Plan Drafting Assistance; Business Certification Assistance (MBE, WOSB, 8A, 501(c) (3), Hub Zone, etc.); and Business Organization Assistance. She is also a contributing writer to the Maryland Daily Examiner Newspaper. Contact information: firstname.lastname@example.org; www.facebook.com/FACMBC; www.twitter.com/FACMBC; https://dzimmerman36.wordpress.com; http://www.linkedin.com/in/dzbusconsultantandmediator