Business partnerships can offer many benefits but there can be drawbacks that deserve careful attention.
A partnership exists when two or more people share in the ownership of a business entity. All partners contribute to the needs of the business and in return each partner shares in the profits or losses of the business.
Forming a partnership involves registration with the Secretary of State’s office where the business is located. Most business partnerships will also need to register with the IRS and any applicable state and local taxing districts to obtain a tax ID number and a permit for operation.
There are three general forms of business partnerships:
General Partnerships are where all partners, with any deviation from this specifically addressed in the partnership agreement, share the profits, management responsibilities and liabilities of the business equally.
Limited Partnerships allow each partner limited liability as well as limiting input with management decisions. These limits depend on the extent of each partner’s investment percentage.
Joint Ventures function like general partnerships, but are for limited periods of time or for a single venture or project. Continuance of the partnership can be recognized if specifically detailed in the filing documents.
Advantages of Working with Partners:
Partnership forms a shared interest in the success of the business and adds more manpower without additional staffing expense.
Partners offer different perspectives and skills that can improve business performance and enhance success.
Partners are invested in the business, pooling resources and expecting accountability.
Disadvantages of Working with Partners:
Partners share in the liabilities of the business and the debts and decisions of the other partners.
Partners may have different ideas about the direction or operations of the business, leading to disagreements that require patience and maturity to resolve.
Joint ownership means that the success and profits of the business are shared even if partners’ work ethics differ leading to unequal contributions.
Dissolution of a Partnership:
The partnership’s Buy Sell Agreement defines the methods of dissolving a partnership. This agreement can take many forms. One example of an agreement is the “Shotgun Buy/Sell Agreement”. Here is how a “Shotgun Buy/Sell Agreement” works:
At any time, one owner of the business can make notification to the other owner(s) of intent to purchase the other’s interests in the business for a certain dollar amount. The other owner(s) then has a specified period of time to respond by agreeing to sell his interest for the offered amount or by buying out the offering partner for the same amount.
This form of agreement forces action and provided both partners are equally able to meet the pending financial obligations of the offer, generally provides a fair valuation of the business.
A partnership can be a wonderful thing if partners compliment each other and share the same business goals; however it is absolutely paramount that partners act as employees of the business and leave their ownership egos at the door!