If your business will be owned and operated by more than one individual, structuring as a partnership may be the best way to go. There are two types: a general partnership and a limited partnership.
In a general partnership, the partners manage the company and assume responsibility for the business debts and other obligations.
A limited partnership has both general and limited partners. The general partners own and operate the business, and assume liability for the partnership. The limited partners serve as investors – they have no control over the company, and are not subject to the same liabilities as the general partners.
A general partnership is an appropriate structure when there is more than one partner who wishes to be active in the business. It is also easier to form than a limited partnership.
A limited partnership requires multiple filings, and involves administrative complexities.
General partners, like sole proprietors, are personally liable for the partnership’s obligations and debts. Each general partner can act on behalf of the partnership, take out loans and make decisions that will affect and be binding on all the partners (if the partnership agreement permits).
A partnership has tax advantage. The business isn’t taxed on its income, but “passes through” profits or losses to the individual partners.
Before you structure your business, be sure to draft an agreement to specify operational and administrative procedures such as, how decisions will be made, how disputes will be resolved, and how a buyout will happen. This agreement will be critical, especially when you run into unforeseen circumstances, disagreements with one of the partners, or if someone wants to leave the business.
It is recommended to consult and hire an attorney who experienced with small businesses to draft the agreement.
Also consider:
• Ownership and authority. It’s not necessary, for two owners to equally share ownership and authority. Be sure the proportion is stated clearly in the agreement.
• Percentage of voting rights. When two partners own the business 50-50, there’s the possibility of a deadlock. A trusted associate can be a third party – with just 1 percent interest, who can provide the tie-breaking vote.
• What will happen if a partner gets sick or is dying?
• What are the retirement provisions?
• Under which circumstances can modify your partnership agreement. Define the process for making changes.
• When one partner withdraws, how will the purchase price be determined? A neutral third party, such as your banker or accountant can find an appraiser to determine the value of the partnership interest.
• Your agreement will also establish the buy-out terms of when the money will be paid – for example, you can agree that the money be paid over three, five or 10 years, with interest.
A qualified attorney will guide you and your partners to make the best decisions to enable your business to thrive in the long run.