- Learn what a partnership is
- Find out which type works for you
- Discover elements to include in your agreement
Need additional capital to start and run your business? Need some expertise and management help? Maybe a partnership is the best business form for you. A partnership is an entity wherein two or more people own a business. How they participate in the partnership depends on what type it is: general or limited.
A general partnership consists of two or more partners, each of whom has equal legal responsibility for the company’s actions and debts. The partners don’t have to contribute the same amount of capital or skill, and they aren’t required to split profits evenly. General partners, typically, have unlimited liability, just as sole proprietors do. The details of capital and profits are included in the partnership agreement.
A limited partnership has at least one general (active) partner and one or more investors whose liability is limited to the amount of their financial contributions. If they invest $50,000 and the business somehow loses $200,000, the limited partner only loses the $50,000 while the general partner loses the rest. However, in most partnership agreements, the limited partner has no power in the day-to-day operations of the business.
The way in which partnerships are taxed is based on the partnership agreement. If it is an equal general partnership, the year’s profits are split evenly and each partner must pay taxes on the amount received. In a limited partnership, the partners are taxed based on their share. If a limited partner receives 25 percent of profits, that is the amount the partner must pay taxes on, not on the entire profit of the business.
An Agreement of General Partnership includes the name and place of business, purpose of the business, and term (length of the partnership agreement). It also identifies the general partners, states how profits and losses will be distributed, notes how partnership interests can be assigned to others (if at all), and lists the rights and responsibilities of the general partners.
In addition, there are terms that specify what will happen at the death or retirement of a general partner, as well as how the partnership can be terminated. Partners should also have insurance on each other in case an accident or the death of one partner impacts the business.
Partnership agreements should be drawn up by a business attorney and should include clauses that direct the partnership if a member dies, is incapacitated, or wants to sell her or his interest in the business. Drawn up by a business attorney, a partnership agreement is a binding contract that will guide your business decisions.