As you already know from an earlier article on business structures, a partnership is a single business where two or more people share ownership.
Each partner contributes to all aspects of the business — including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships involve more than one person in the decision-making process, it is important to discuss a wide variety of issues up front and develop a written partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership.
There are three general types of partnership arrangements:
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. This structure allows a type of partner — called limited partners — to have limited liability as well as limited input into management decisions.
Joint Ventures act as general partnerships, but for only a limited period of time or for a single project.
Is this structure right for your business? To help you decide, these are the main pros and cons of doing business as a partnership:
Advantages of a Partnership
- Easy and Inexpensive. Partnerships are generally an inexpensive and easily-formed business structure. The majority of time spent starting a partnership involves developing the partnership agreement.
- Shared Financial Commitment. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital.
- Complementary Skills. A good partnership should utilize the strengths, resources and expertise of each partner.
- Partnership Incentives for Employees. Partnerships have an employment advantage over other entities if they can offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees. Traditional law firms are a good example of this.
Disadvantages of a Partnership
- Joint and Individual Liability . Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners and employees. The personal assets of all partners can be used to satisfy the partnership’s debt.
- Disagreements Among Partners. With multiple partners, there are bound to be disagreements. A good partnership agreement and good will among the partners are the best protections against problems.
- Shared Profits. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. When there are unequal contributions of time, effort, or resources, this can cause discord among partners.
**This article is designed to provide helpful information that can be read within 2 minutes. It is neither a full explanation of this subject nor legal advice. To learn more, and to get legal advice on which you can rely, contact me or another lawyer.