Four things you must decide to set up a business partnership

On Behalf of | Mar 3, 2019 | Firm News |

Forming a partnership can be a great business opportunity. You have a partner to bounce ideas off, and you can utilize your partner’s business strengths. It is also less pressure when starting a business, since you know you are not going it alone.

Setting up a partnership is easier than setting up other types of business entities. You do not set up a board of directors or file a bunch of paperwork. You and your partner file your taxes on your individual income tax returns, since your partnership is a pass-through entity.

Who will do what?

You can share your partnership responsibilities several ways. You may choose to divide the daily responsibilities, or one partner may want to be less involved in the day-to-day. According to The Balance, partners who are involved in the everyday decisions are called general partners, and partners who have a less involved role are called limited partners.

Typically, in a limited partnership, this partner contributes money to the partnership, but has little say in how the business is run. A limited partner also has limited personal liability in the business, so what this partner invests is the only money he or she has at risk for business debts. In other words, a limited partner cannot have their house seized to pay off partnership debts.

How will profits be divided?

If one partner has a smaller role within the company, that partner may get a smaller share of the profits. Or maybe you have equal roles, so you decide to split everything fifty-fifty. How much each partner contributes to the startup money usually also affects how profits are divided among business partners. A partner that invests more money initially usually gets a bigger stake in the business. Keep in mind too that how profits are divided is also how losses are divided. If you receive 60 percent of the profits, you also receive 60 percent of the losses.

Which type of partnership?

With a general partnership, both you and your partner contribute to the daily activities of running a business. Both also share liability for business debts.

In a limited partnership, there are both general and limited partners. Some partners have more active roles and more liability, and other partners have a limited say in the business, but also limited risk.

According to Investopedia, a limited liability partnership (LLP) functions more like a general partnership because all partners can have an active role in running the business. However, an LLP shields one partner from the negligence of another partner. Generally, with an LLP, the other partner’s personal assets are shielded from creditors or lawsuits.

What will your company’s name be?

Then you can move on to naming your business. The name will depend partly on your type of partnership. If you formed an LLP, you will want to include this in the name of your business. You must register your partnership’s name with the state. You can usually do this online.

You will also need to set up an employee ID number, and there may be other licenses and permits you need for your business. After you have determined who does what, how profits are divided, the partnership type and the name of your business, you should consider drawing up a partnership agreement. A partnership agreement puts your terms in writing and can help protect your interests if there are disputes between you and your partner later. Also, unless you put it in writing, the state will likely assume partners have an equal interest in the company.