Deciding to go into business for yourself is a major decision on its own — but deciding to join forces with a partner is a completely different ballpark. If you’re thinking about starting a business with a partner, consider structuring your business as a general partnership.
General partnerships are one of the most common legal business entities, granting ownership to two or more people who share all assets, profits and liabilities. In a general partnership, it’s important to understand that each person is responsible for the business and is liable for the actions of their partner(s). To help avoid any issues with your partners throughout your business journey, you’ll want to write a partnership agreement before moving forward.
[Read: What Is a General Partnership?]
What is a partnership agreement and why do you need one?
Nolo noted that, because you and your partners are equally responsible for the business as well as the outcomes of one another’s decisions, creating a partnership agreement is a great way to structure your relationship with your partners to best suit your business.
Partnership agreements are a protective measure to ensure any and all disagreements can be resolved quickly and fairly, and to understand what to do in the event that the partners wish to dissolve the working relationship or business in its entirety.
What should be in a partnership agreement?
Your partnership agreement needs to cover a lot of ground. According to Investopedia, the document should include the following:
- Name of your partnership. While it may seem like common sense, one of the first things you and your partner(s) must agree on is the name of your business.
- Contributions to the partnership and percentage of ownership. Create a list of specific contributions you and your partner(s) will make to the business. In addition to contributions, you must decide on the percentage of ownership, which is typically dictated by each partner’s contributions to the business.
- Division of profits, losses and draws. You and your partner must decide how to divide the business’s profits, losses and draws. Partners can agree to share the profits and losses in accordance with their percentage of ownership, or they can be distributed equally amongst the partners regardless of ownership stake.
- Partners’ authority. Partnership authority, also known as binding power, should be defined within the partnership agreement. The ability to bind the business to a debt or a contractual agreement can expose the business to unnecessary risk, which is why the partnership agreement should explicitly state which partner(s) have binding authority.
- Withdrawal or death of a partner. While no one wants to consider the possibility of a partner’s withdrawal or untimely death on the brink of launching a new business, this is something that needs to be clearly stated in the partnership agreement. The agreement should also outline the valuation process for the business and/or any requirements for maintaining a life insurance policy designating the other partner(s) as the beneficiaries.
To avoid conflict and maintain trust between you and your partner(s), be sure to discuss all business goals, the commitment level of each partner and salaries prior to signing the agreement.
Advantages and disadvantages of a partnership
There are several advantages and disadvantages of a general partnership. Some advantages include:
- Being easy to establish.
- Simplifying your taxes.
- Being easy to dissolve.
The two main disadvantages of general partnerships are:
- Personal assets aren’t protected.
- Partners are liable for each other.
How do you structure a 50/50 partnership?
According to UpCounsel, under a 50/50 partnership, each partner has an equal say in the overall operation and management of the business. Structuring a 50/50 partnership requires consent, input and trust from all business partners. To avoid conflict and maintain trust between you and your partner(s), be sure to discuss all business goals, the commitment level of each partner and salaries prior to signing the agreement.
Additionally, before you draft or sign a partnership agreement, be sure to consult with an experienced business attorney to ensure everyone’s investment in the partnership and business is protected.
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