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Which Business Entity is Right for You? (Part 4)
PART 4 — PARTNERSHIPS
The first thing you should be aware of when it comes to General Partnerships, whose owners are known as GPs (general partners), is that it is managed by all partners and all partners are liable for the negligence and/or debts of the business.
Each and every partner has a say in how the business is run and, even if only one partner makes a mistake, each and every partner takes the heat for it. Of course, this liability is only a problem if you or your partners cannot be trusted to run the business.
Partnerships are often used when franchising a business or when all partners contribute equally to the success of the business, such as a law firm. Taxes are paid through each partners personal income tax. There are no costs or formalities for designating your business as a partnership entity, and the only document required is a Partnership Agreement, which is crucial and should include:
• Amount each partner will invest in the business and when said investments will be made (upfront, annually, etc.);
• Rights and duties of each partner;
• Method for distributing profits and sharing in losses;
• Policies regarding withdrawals of the business assets;
• Designated division of the business profits among members;
• Policies and methods for dispute resolution;
• Policies and methods for including a new partner;
• Method for dissolving the partnership, when and if necessary.
Typically profits are divided equally among members, but you can designate otherwise in your partnership agreement. Keep in mind that giving one partner a larger percentage of the business assets does indicate that they have a stronger say in the decisions regarding the operation of the business. It is usually in the best interest of all involved to stick to equal distribution.
A partnership lasts only as long as a good relationship between partners. It can be dissolved if the partners no longer wish to work together using the methods indicated in the partnership agreement, which can include the sale of the business as well as dismissing one member and bringing another in.
Partnerships also have the option of including one or more limited or silent partners (LPs). LPs are individuals who invest in the partnership but, based upon the Partnership Agreement, are limited in their involvement in the operation of the business. Also, LPs’ legal liability is generally limited to how much they invest, so they can basically reap the benefits of the partnership (i.e. profits) without being responsible for the debts.
It is important that you examine all of the available options for business entity designation and determine which is best for you and your business before you get the ball rolling. Please consult with a lawyer before before making any legal decisions.
• Entrepreneur.com: Business Structure Basics
• Start-a-Business.com: General Partnership
• AllBusiness.com: Corporation, Partnership, or an LLC?
• About.com: Partnerships
• Wikipedia.org: General Partnership and Limited Partnership
Related Small Business Buzz Posts:
Which Business Entity is Right for You? (Part 3)
Picking the Right Business Partner
Which Business Entity is Right for You? (Part 2)
The Warning Signs of a Doomed Partnership
Which Business Entity is Right for You? (Part 1)