Part II: Partnership
“Partnership: General, Limited and Joint Venture”
Starting a law firm? An accounting practice? Truth is, many service companies with so-called “partners” are best suited incorporating as a partnership (duh). A partnership is simply a company in which two or more people share ownership.
Ostensibly, each partner contributes to all aspects of the business (capital, property, labor). In return, partners share the profits and losses of the business. Because of the added layer of collective decision-making, it is important to iron-out a wide variety of issues that will inevitably arise. Standard practice is to sign a legal partnership agreement that should explicitly state how decisions will be made, profits divided, disputes resolved, ownership changed (bring in new partners or buy outs) and how to dissolve the partnership.
Although partnership agreements are not legally required, they are strongly recommended. Let us be clear: it is considered extremely risky to operate without one and we beg that you consult a lawyer in this process. To get you prepped for that meeting, here are three types of partnerships:
- General Partnership – “You and your partners are the business”
- Like sole proprietorship, a very simple agreement, but this time among partners
- Assume that profits, liability are divided equally
- Unless, you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement
- Unlike Sole Proprietorship, you can raise money by selling partnership interests
- Limited Partnership – “You, your partners, with investors”
- Has all the aspects of General Partnership at the management level
- But also includes a layer called of Limited Partners that have limited management input, but are passive owners that are not personally liable to pay company expenses
- Limited partnerships are attractive to investors of short-term projects
- Joint Venture – “General Partnership, but for one project or period of time”
- Acts just like a General Partnership, but for only a limited period of time or for a single project
- Joint Ventures often take place between two general partnerships
- Of course, partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such
As far as taxes go, it depends on the agreement itself and the state in which the agreement is signed. As a general rule, assume you must register your business with the IRS, state and local revenue agencies, and obtain a tax ID number. Also, partnerships must always furnish copies of a Schedule K-1 (Form 1065). Because partnerships can be very complicated, see the IRS guide to Partnerships if you have any questions.
Thanks for reading and all you partners out there should not be afraid to reach out to me if you’re looking for some help. My personal email is firstname.lastname@example.org and I’ll be happy to answer any questions.
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If Sole Proprietorship isn’t the right structure for your startup, check in after the holidays for Limited Liability Corporations.