A partnership is an association of two or more persons who carry on as co-owners and share profits. There can be a contribution of money (a capital investment in the business project) or services in return for a share of the profits.
There are three types of partnerships — general partnerships, joint ventures, and limited partnerships.
In a general partnership, the partners equally divide management responsibilities, as well as profits.
Joint ventures are the same as general partnerships except that the partnership only exists for a specified period of time or for a specific project.
Limited partnerships consist of partners who maintain an active role in the management of the business, and those who just invest money and have a very limited role in management. These limited partners are essentially passive investors whose liability is limited to their initial investment. Limited partnerships have more formal requirements than the other two types of partnerships.
There are no formalities for a business relationship to become a general partnership. This means you don’t have to have anything in writing for a partnership to form. The key factors are two or more people who are carrying on as co-owners and sharing profits. Even if you don’t intend to be a partnership, if that’s how you hold yourself out to the public, then your relationship will be deemed a partnership and all partners will be liable for the obligations of the partnership (see liability issues below). Although there’s no requirement for a written partnership agreement, often it’s a very good idea to have such a document to prevent internal squabbling (about profits, direction of the company, etc.) and give the partnership solid direction.
Limited liability partnerships do have a writing requirement. It’s a document that states that a limited partner has invested money into the partnership and retains little or no control over the partnership’s operations. In this way, limited partners will not be held liable for the partnership’s debt obligations and the partnership won’t be influenced too greatly by the limited partner.
Partnerships are unique business relationships that don’t require a written agreement. However, it’s always a good idea to have such a document. Because partners share profits equally in the absence of a written agreement, you could run into situations where you feel that you’re doing all of the work, but your partner is still getting half of the profits. It’s always smart to cover major issues related to your business in writing.
The only requirement is that in the absence of a written agreement, partners don’t draw a salary and share profits and losses equally. Partners have a duty of loyalty to the other partners and must not enrich themselves at the expense of the partnership. Partners also have a duty to provide financial accounting to the other partners.
For example, if you’re in a partnership, you cannot make a deal to buy from a supplier at an inflated price with the understanding that you will receive a kickback from the supplier. It’s a violation of your duty to the partnership, and your partners can demand an accounting from you regarding the deal. If you’re found to have violated your duties, the partners can sue you for damages and strip you of your profits from the deal.
On the other hand, if you simply make a bad deal by signing a contract to pay a supplier an inflated price, the partnership will be forced to accept the deal. One of the potential drawbacks of a partnership is that the other partners are bound to contracts signed by each other on behalf of the partnership. Choosing partners you can trust, and who are savvy, is critical.
- easy to establish
- raising funds may be easier with more owners
- profits go right into partners’ pockets, providing for easier tax reporting
- partners can combine their individual talents to complement each other and strengthen the partnership
- employees may be attracted to work for the partnership if they have an opportunity to become a partner
- partners are individually liable for business debts
- partners are subject to the actions of other partners
- limited life of a partnership — if one partner leaves the partnership can end
- shared decision making means you do not have full control, which could lead to disagreements or paralysis of the partnership