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Earlier this year, I shared what happens when a small business chooses to incorporate as a limited liability company (LLC). Entrepreneurs may also choose to incorporate as other business formations including corporations, non-profits, and partnerships.

In this article, we’ll be focusing on what it means to form a partnership. We’ll cover details like these, and more, that surround partnerships.

  1. What is a Partnership?
  2. Types of Partnerships
  3. Written Partnership Agreement

Tip: If you’re using Rollovers for Business Start-ups (ROBS aka 401(k) Business Financing) for funding or growth capital, you’re required to form as a C-Corporation. However, you can still have multiple owners within the structure!

What is a Partnership?

A partnership is a business structure that establishes an agreement to start and operate a business between two or more people.

A business owner may choose a partner for a variety of reasons. They may pick a close friend, family member, spouse, or like-minded colleague to go into business with because they trust one another. This partner may also have a similar work ethic and exhibit characteristics that complement one another in business.

Above all, a partnership requires both partners to share an interest in starting the same business and contributing to the greater good of the startup. Partners must be able to work as a team. They will split costs, share profits, make decisions, and provide support for one another equally.

Different Types of Partnerships

Not all partnerships are created in the same way. There are different types of partnerships that allow partners to be more or less involved in the business. Here are the most common partnerships:

  • General partnerships
  • Joint venture partnerships
  • Silent partnerships
  • Limited liability partnerships (LLPs)

Let’s explore what happens in each type of partnership.

What is a General Partnership?

A general partnership is when two or more partners establish an agreement for running a company with profits, liabilities, and management duties divided equally across all partners.

Those forming a general partnership are often advised to incorporate or form an LLC. Why? General partnerships are often considered to be unincorporated businesses. Without limited liability found in a business entity, the partners don’t have a limit on their personal liability. If the partnership incurs debts, for example, personal assets belonging to a partner could be used to repay that debt. Incorporating or forming an LLC provides the business, and its partners, with limited liability protection. This ensures better peace of mind in running the partnership.

What is a Joint Venture Partnership?

A joint venture partnership is designed to be a temporary partnership. This partnership comes with an expiration date. It is often chosen by partners that wish to complete a certain phase of development or speed up certain processes within the business. Once the partners are able to reach that phase or process and all objectives have been met, the joint venture partnership will expire.

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What is a Silent Partnership?

In a silent partnership, one partner is allowed to step behind the curtain of the business, so to speak. They may provide capital to the partnership but be less involved in the day-to-day responsibilities. The other partner, or partners, may assume these responsibilities equally and grant the partner the opportunity to be less vocal in the partnership.

What is a Limited Liability Partnership (LLP)?

Limited liability partnerships (LLPs) may look quite similar to LLCs. What’s the difference? While both offer liability protection and a pass-through tax structure, an LLP is reserved for professionals in specific professions. These include roles like doctors, lawyers, and accountants where the professional is licensed by the state. An LLP will protect partners in these licensed professions from consequences stemming from the negligence or malpractice of one partner, such as lawsuits and debtors.

Are LLPs recognized in every state? The laws for this entity tend to vary. Some states, like California, Nevada, New York, and Oregon, have enacted laws limiting the LLP structure to those in qualifying licensed professions. Review your state of incorporation’s laws to see if the state limits LLPs to certain professions prior to forming an LLP.

What’s a Written Partnership Agreement?

As you go into business with a partner, you will be dividing profits, liabilities, and management duties equally among the partners. Putting a written partnership agreement in place protects your partnership. It ensures that each partner understands their roles and duties in the business. It also gives you the chance to outline additional terms as they pertain to the partnership which we will cover below.

Items to Cover in a Written Partnership Agreement

A written partnership agreement should cover details regarding the following aspects of a partnership.

  • Partnership term. This is the official start date of the partnership. It should have a specific month, day, and year. Typically, partnerships continue indefinitely. Termination terms, however, should also be outlined in the agreement in the event of a termination.
  • Roles and responsibilities. These are the daily duties that each partner has in the partnership.
  • Capital. How much capital will each partner invest into the partnership? A written partnership agreement covers each partner’s capital contributions. It also outlines the account the money will be count in, how and when partners are paid, and the terms of profits and losses for each partner.
  • New partner admittance. Do you plan to admit more partners into the business? If so, you will need to outline instructions for this process.
  • Voluntary/involuntary withdrawal of a partner. Partners may choose to leave a partnership or may involuntarily withdraw from the partnership for a number of reasons. Instructions for terms that explain the process of withdrawal should be included in your partnership agreement. Additionally, it’s critical to include instructions for the passing of a partner. The written partnership agreement should be able to outline the right of the surviving partner. All terms should be mutually agreed on by the partnership’s partners.

Forming a partnership requires doing a bit more than agreeing to go into business with a partner. It requires reviewing the varying types of partnerships to determine which is a fit for the partners and the business. Putting all terms of the partnership into writing helps lay the foundation for the business to grow and keeps its partners on the same page. From here, you may file your paperwork with the state (or with a third-party incorporation filing service like MyCorporation), pay a small fee, and have your business approved as a partnership entity.

Deborah Sweeney is the CEO of MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @deborahsweeney and @mycorporation.

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