Legal Structure of a Business: Partnership

A partnership is a business that is owned and operated by more than one person. Often two or more friends find out that they have similar passion for a particular product or service, and they decide to form an alliance. As with a sole proprietorship, it is relatively easy to form a partnership. There are no major requirements to form this type of entity.

But the fact that there are no legal requirements doesn’t mean that it is advisable to be informal and nonchalant about this type of business ownership. It is prudent and very wise to have a written partnership agreement because it can prevent, or at least minimize, headaches down the road.

A partnership agreement will spell out who will contribute what, and how much of it; how the business will be managed, under what circumstances someone else can join the partnership, as well as how the partnership will be dissolved if and when the time comes.

Some advantages of a partnership are: it is easy to start, given that there are fewer legal formalities than starting a corporation or LLC; there is flexibility, though not as much as with a sole proprietorship; there is depth of experience and perspective, as there are several owner with various talents, skills, and points of view. There is also more ability to obtain capital, since there is more than one person to contribute money to the enterprise. Additionally, there are tax benefits; as the profits will be go directly to the partners and become the partners personal tax liability.

But, as with almost everything in life, there are disadvantages to this type of business ownership. The main one is that in a general partnership, each partner has unlimited liability for the debts of the business. Many believe that each partner is responsible according to the percentage of ownership, but this is not the case. Each partner is wholly responsible for everything. Another drawback is that there isn’t much stability because the illness or death of a partner can severely affect the business. It is also difficult for a partner to sell his or her share of the business because the other partners may not have the capital to buy him out at the time that he wants to sell, and they may not be willing to have that share of the business go to someone they do not know nor feel comfortable with, so the options are limited. And, if a partner dies, the other partners may resist giving the heirs of the deceased partner much say or control, with ensuing tension.

If you are considering this type of business ownership, it is imperative that you consult an attorney for advice, and to prepare a detailed written partnership agreement.