Starting a business with a partner has many benefits, including the fact that you have someone with which you can bear the load of responsibility. Many times, a partnership allows you to double your efforts and profits while dividing the risk and responsibilities. Before you set up this partnership, you should consider a few things.
Type of Partnership
Within the broad category of partnership you will find a variety of types. Each one is unique, and it’s important to understand the differences.
- General partnership – the most standard form where everything is split equally and handled equally
- Limited partnership – general partners manage the business while limited partners provide capital but have very little involvement
- Limited liability partnership – usually comprised of professionals who are licensed, such as accountants or attorneys
All partnerships should be in writing to avoid confusion and disputes later on. The agreement should detail the type of business being formed as well as the rights and responsibilities of each partner. This includes how much interest each partner owns. In a two-person partnership, it is often split 50-50. However, many partnerships do not operate on this even division.
One partner may be responsible for more of the day-to-day routines or decisions, and an equal split may not seem fair. In fact, it is best to have one partner “in charge” to avoid delays in decision-making or disputes over little decisions. Another option is to give each person a portion of the business to manage. For instance, one person takes care of personnel while another handles inventory.
You should also explain how the decisions will be made and when voting is necessary. If you only have two people in the partnership, you must figure out what to do when they disagree. Perhaps one partner’s vote carries more weight or a third partner may be added for voting purposes only.
Provisions should be made for dissolution and how to determine the value of the partnership when dividing up funds. You must also include how and when payment will be made. Perhaps the money will be paid out in payments rather than a lump sum.
Anyone considering a partnership should have an attorney draft the partnership agreement. This ensures everything is handled correctly and all potential issues have been addressed.
A partner acts as an agent of the partnership or makes decisions for the business without consent of other parties. This concept of agency works in any type of business where a person is deemed to be the agent. In a partnership, often all partners are deemed to be agents of the business, which means each person can represent the business without consent of the other partners.
While this is often the case, the business can approve specific authority to certain partners. If this is to be the case, it must be included in the agreement. Without this agreement in place, it is assumed any of the partners can act as agents, which means they can sign contracts and set obligations for the business without the prior knowledge or consent of the other partners.
Before setting up a partnership, it’s a good idea to meet with an attorney who will help you set up your agreement and account for all of the major decisions which will help it run more smoothly.