6.03 – Choosing to Partner Up
Choosing a Partner: The Partnership
A partnership involves two or more people sharing the assets, liabilities, and profits of their business. This setup often improves on a sole proprietorship by distributing responsibilities and providing a platform for exchanging ideas. Additionally, multiple financial statements can support the business, and the entity typically survives if one partner dies or leaves.
However, partnerships come with increased liability. Each partner becomes liable for the obligations incurred by other partners during business operations. For example, if one partner enters a contract on behalf of the partnership to purchase goods, all partners are bound to fulfill that contract, even if the others were unaware. The major exception is that personal debts of an individual partner do not extend to the other partners.
On the positive side, partners use any property owned by the partnership and share in the profits and losses unless otherwise stated in the partnership agreement. Profits and losses don’t have to be shared equally; ownership can be divided as the partners choose. Despite the benefits, partnerships can face conflicts similar to those in family businesses or other team-based business structures. Thus, a well-drafted partnership agreement is crucial from the beginning.
Forming a Partnership
While a written agreement is not mandatory to form a partnership, and a simple oral agreement can suffice, it is highly recommended to formalize the arrangement in writing. In some cases, the conduct of the parties involved can imply a partnership.
Accepting a share of the profits is legally sufficient evidence that you are a partner in the business, meaning you may also be liable for its losses.
Partnerships come in several forms:
- General partners: Share in the profits, losses, and responsibilities, and are personally liable for actions of the partnership.
- Limited partners: Liability is limited to their investment amount.
- Secret partners: Active in the ventures but unknown to the public.
- Silent partners: Usually inactive with only a financial interest in the partnership.
Drawing up the Partnership Agreement
The importance of a partnership agreement cannot be overstated. Even if you have known your partner for years or they are a family member, a formal agreement is necessary to separate business from personal relationships. This agreement provides a structured method for resolving disagreements or dissolving the partnership if needed.
Consulting an attorney when drafting the agreement ensures that it is legally sound and comprehensive. The partnership agreement should address the following:
- The legal name of the partnership.
- The nature of the business.
- The duration of the partnership, including an end date.
- Each partner’s contribution to the partnership, such as capital, goods, or services.
- Any sales, loans, or leases to the partnership.
- Management responsibilities.
- The process for selling a partnership interest, including restrictions and methods for divesting.
- Procedures for dissolving the partnership.
- Provisions for the departure or death of a partner.
- Methods for resolving disputes.
Without a partnership agreement, all partners are considered equal under the law, which may not reflect the intended arrangement and could lead to complications. A well-crafted agreement ensures clarity and fairness for all parties involved.
