Various Type Of Organization Structure
A business may be carried on in any one of the following form:1.
Sole proprietorship (Part 1 of 3)2.Partnership3. Limited
Company
CHARACTERISTIC OF A PARTNERSHIP:
1. A partnership is not a legal entity such that the partnership
has to sue or be sued in the names of the partners;
2. The liability of each partner is unlimited;
3. A partnership must comprise of at least two members. The
maximum number allowed is twenty;
4. Partnerships are governed by the relevant Partnership Act. If
the partners do not make their own agreement, or if their own
agreement does not cover any particular matter specified in the
Partnership Act, provisions of the Partnership Act dealing with
that particular matter will become applicable.
Advantages of a Partnerhip:
1. Like the Sole proprietorship, disclosure of financial
statements to the general public are not required;2. Easy to form
compared to a limited company;3. higher capital is available
compared to a sole proprietorship;4. taking advantage of the
different expertise and skill of the different partners;5. low cost
of formation;6. Tax advantage;7. partnerships not subjected to many
regulations compared to limited companies
Disadvantages of a Partnership:
1. Lack of flexibility unlike the one-man show of a sole
proprietorship;2. Still cannot avoid the unlimited liability like
the sole proprietorship;3. Limited life when one of the partners
withdraws or dies, then the partnership will dissolve by itself;4.
Conflicts amongst the partners might affect the stability of the
partnership;5. Capital though higher than a sole proprietorship but
still limited compared to a limited company.
Salient Points to note:
The general practice is to have some form of agreement between
the partners setting out their rights, duties and liabilities. This
agreement is referred as the Partnership Deed.The normal clauses in
a Partnership Deed includes the following: Names of the partners
and firms name; Nature of the business; Term of the partnership;
Capital to be introduced by each partner; Profit and loss sharing
ratios; Arrangements as to partners drawings and salaries;
Arrangements regarding interest on capital, advances and drawings;
Provisions regarding the retirement or death of a partner; Method
of valuing goodwill upon retirement or death of a partner and Other
details to be observed by partners.
Partnership
A partnership is an arrangement where parties agree to cooperate
to advance their mutual interests.
Since humans are social beings, partnerships between
individuals, businesses, interest-based organizations, schools,
governments, and varied combinations thereof, have always been and
remain commonplace. In the most frequently associated instance of
the term, a partnership is formed between one or more businesses in
which partners (owners) co-labor to achieve and share profits and
losses (see business partners). Partnerships are also common
regardless of and among sectors. Non-profit, religious, and
political organizations, may partner together to increase the
likelihood of each achieving their mission and to amplify their
reach. In what is usually called an alliance, governments may
partner to achieve their national interests, sometimes against
allied governments who hold contrary interests, such as occurred
during World War II and the Cold War. In education, accrediting
agencies increasingly evaluate schools by the level and quality of
their partnerships with other schools and a variety of other
entities across societal sectors. Partnerships also occur at
personal levels, such as when two or more individuals agree to
domicile together, while other partnerships are not only personal
but private, known only to the involved parties.
Partnerships present the involved parties with special
challenges that must be navigated unto agreement. Overarching
goals, levels of give-and-take, areas of responsibility, lines of
authority and succession, how success is evaluated and distributed,
and often a variety of other factors must all be negotiated. Once
agreement is reached, the partnership is typically enforceable by
civil law, especially if well documented. Partners who wish to make
their agreement affirmatively explicit and enforceable typically
draw up Articles of Partnership. It is common for information about
formally partnered entities to be made public, such as through a
press release, a newspaper ad, or public records laws.
While partnerships stand to amplify mutual interests and
success, some are considered ethically problematic. When a
politician, for example, partners with a corporation to advance the
corporation's interest in exchange for some benefit, a conflict of
interest results. Outcomes for the public good may suffer. While
technically legal in some jurisdictions, such practice is broadly
viewed negatively or as corruption.
Governmentally recognized partnerships may enjoy special
benefits in tax policies. Among developed countries, for example,
business partnerships are often favored over corporations in
taxation policy, since dividend taxes only occur on profits before
they are distributed to the partners. However, depending on the
partnership structure and the jurisdiction in which it operates,
owners of a partnership may be exposed to greater personal
liability than they would as shareholders of a corporation. In such
countries, partnerships are often regulated via anti-trust laws, so
as to inhibit monopolistic practices and foster free market
competition. Enforcement of the laws, however, is often widely
variable. Domestic partnerships recognized by governments typically
enjoy tax benefits, as well.
Definition in civil lawA partnership is a nominate contract
between individuals who, in a spirit of cooperation, agree to carry
on an enterprise; contribute to it by combining property, knowledge
or activities; and share its profit. Partners may have a
partnership agreement, or declaration of partnership and in some
jurisdictions such agreements may be registered and available for
public inspection. In many countries, a partnership is also
considered to be a legal entity, although different legal systems
reach different conclusions on this point.
GermanyKommanditgesellschaftPartnerships may be formed in forms
of the General Partnership (Offene Handelsgesellschaft, OHG) or
Limited Partnership (Kommanditgesellschaft, KG). A partnership can
be formed by only one person. In the OHG, all partners are fully
liable for the partnership's debts, whereas in the KG there are
general partners with unlimited liability and limited partners
whose liability is restricted to their fixed contributions to the
partnership. Although a partnership itself is not a legal entity,
it may acquire rights and incur liabilities, acquire title to real
estate and sue or be sued
ChinaPartnership (China)In mainland China, a partnership
enterprise encompasses two types of partnershipsgeneral
partnerships and limited partnerships. A general partnership
comprises general partners who bear joint and several liabilities
for the debts of the partnership enterprise. There is a special
general partnership which can be employed by professional service
providers such as accountant firms and law firms. A limited
partnership enterprise includes general partners and limited
partners where the limited partners are liable only to the extent
of their capital contributions.
JapanThe Japanese civil code provides for partnerships by
contract, which are commonly known as nin'i kumiai ( ) or
"voluntary partnerships." A more recent statute has allowed for the
creation of limited liability partnerships.
One form of partnership unique to Japan is the tokumei kumiai or
"anonymous partnership," in which partners have limited liability
so long as they remain anonymous in their capacity as partners and
do not participate in the operation of the partnership. Japan
provides for partnership-like corporations called mochibun
kaisha.
NetherlandsAccountants in the Netherlands organized themselves
for the first time as partnerships in 1890 when two single
proprietorships bundled their efforts to form a partnership. The
event was followed by numerous other events, including additional
consolidation and entrepreneurship, mergers and acquisitions,
internationalization regulatory and economic discontinuities that
changed the sector dramatically. Partnerships differ from private
and public corporations in that all partners are fully responsible
for decisions made by any of the partners. A historical and
organizational study of accounting partnerships in The Netherlands
over the period 1890-1990 showed that partnerships benefit greatly
from supplementing partners with associates ( the ratio of partners
to associates refers to "leverage' and greatly impacts the
partnerships survival odds, but only partners as so called residual
claimants are liable for the conduct and performance of the
partnership as firm). Also the heterogeneity of the partners as a
group of professionals benefits from compositional effects such as
homogeneity in experience and other demographic
characteristics.
Common lawUnder common law legal systems, the basic form of
partnership is a general partnership, in which all partners manage
the business and are personally liable for its debts. Two other
forms which have developed in most countries are the limited
partnership (LP), in which certain limited partners relinquish
their ability to manage the business in exchange for limited
liability for the partnership's debts, and the limited liability
partnership (LLP), in which all partners have some degree of
limited liability.
There are two types of partners. General partners have an
obligation of strict liability to third parties injured by the
Partnership. General partners may have joint liability or joint and
several liability depending upon circumstances. The liability of
limited partners is limited to their investment in the
partnership.
A silent partner is one who still shares in the profits and
losses of the business, but who is uninvolved in its management,
and/or whose association with the business is not publicly known;
these partners usually provide capital.
Hong KongPartnership (Hong Kong)A partnership in Hong Kong is a
business entity formed by the Hong Kong Partnerships Ordinance,
which defines a partnership as "the relation between persons
carrying on a business in common with a view of profit" and is not
a joint stock company or an incorporated company. If the business
entity registers with the Registrar of Companies it takes the form
of a limited partnership defined in the Limited Partnerships
Ordinance. However, if this business entity fails to register with
the Registrar of Companies, then it becomes a general partnership
as a default.AustraliaPartnership (Australia)Summarising s. 5 of
the Partnership Act 1958 (Vic) (hereinafter the "Act"), for a
partnership in Australia to exist, four main criteria must be
satisfied. They are:
Valid Agreement between the parties;To carry on a business this
is defined in s. 3 as "any trade, occupation or profession";In
Common meaning there must be some mutuality of rights, interests
and obligations;View to Profit thus charitable organizations cannot
be partnerships (charities are typically incorporated associations
under Associations Incorporations Act 1981 (Vic))Partners share
profits and losses. A partnership is basically a settlement between
two or more groups or firms in which profit and loss are equally
divided
United Kingdom limited partnershipMain articles: UK partnership
law and Limited Partnership Act 1907A limited partnership in the
United Kingdom consists of:One- twenty people (except in solicitors
and banks) called general partners, who are liable for all debts
and obligations of the firm; andOne or more people called limited
partners, who contribute a sum/sums of money as capital, or
property valued at a stated amount. Limited partners are not liable
for the debts and obligations of the firm beyond the amount
contributed.
Limited partners may not:Draw out or receive back any part of
their contributions to the partnership during its lifetime; orTake
part in the management of the business or have power to bind the
firm.If they do, they become liable for all the debts and
obligations of the firm up to the amount drawn out or received back
or incurred while taking part in the management, as the case may
be.
India and PakistanAccording to section 4 of the Partnership Act
of 1932, which applies in both India and Pakistan, "Partnership is
defined as the relation between two or more persons who have agreed
to share the profits and losses according to their ratio of
business run by all or any one of them acting for all". This
definition superseded the previous definition given in section 239
of Indian Contract Act 1872 as Partnership is the relation which
subsists between persons who have agreed to combine their property,
labour, skill in some business, and to share the profits thereof
between them. The 1932 definition added the concept of mutual
agency.
A partnership firm is not a legal entity apart from the partners
constituting it. It has limited identity for the purpose of tax law
as per section 4 of the Partnership Act of 1932.
USAPartnership taxation in the United StatesThe federal
government of the United States does not have specific statutory
law governing the establishment of partnerships. Instead, each of
the fifty states as well as the District of Columbia has its own
statutes and common law that govern partnerships. These states
largely follow general common law principles of partnerships
whether a general partnership, a limited partnership or a limited
liability partnership. In the absence of applicable federal law,
the National Conference of Commissioners on Uniform State Laws has
issued non-binding models laws (called uniform act) in which to
encourage the adoption of uniformity of partnership law into the
states by their respective legislatures. This includes the Uniform
Partnership Act and the Uniform Limited Partnership Act. Although
the federal government does not have specific statutory law for
establishing partnerships, it has an extensive and hyperdetailed
statutory scheme for the taxation of partnerships in the Internal
Revenue Code. The IRC is Title 26 of the United States Code wherein
Subchapter K of Chapter 1 creates tax consequences of such great
scale and scope that it effectively serves as a federal statutory
scheme for governing partnerships.
Islamic LawQiradThe Qirad and Mudarabas institutions in Islamic
law and economic jurisprudence were the precursors to the modern
limited partnership . These were developed in the medieval Islamic
world, when Islamic economics flourished and when early TRADING
COMPANIES, big businesses, contracts, bills of exchange and
long-distance international trade were established.
In medieval Italy, a business organization known as the commenda
appeared in the 10th century. As an institution, the commenda is
very identical to the qirad but whether the qirad transformed into
the commenda, or the two institutions evolved independently cannot
be stated with certainty.
Read more:
http://www.referenceforbusiness.com/knowledge/Partnership.html#ixzz3WEBPoC00
How to Structure a PartnershipPartnerships are incredibly
common--and incredibly hard to sustain. Here's how to set up a
partnership that is equitable, efficient, and mutually rewarding.
When two or more people start a business or carry on a trade
together to turn a profit, the result can often be a strong union
that blends complementary skills, financial resources, customers
and connections to help the venture succeed. But, sometimes, such
relationships can sour, the business can fail, and the parties can
decide to go their separate ways. In the eyes of the law, by the
very nature of entering into business with another party, you may
be considered a partnership -- whether you have a written agreement
or not. It's best to follow certain legal and practical steps to
structure this relationship so that it is a win-win for all
concerned.
The number of business partnerships in the U.S. has been growing
steadily by an annual rate of about 5.6 percent a year to more than
3 million in 2007, according to the most recent records reported by
the U.S. Internal Revenue Service. The total net income for these
partnerships has also been on the rise, increasing by 2.5 percent
from 2006 to a total $683 billion for 2007, IRS figures show.
With that much money at stake, it's important for partnerships
to spell out what each person contributes, whether in terms of
financing, property, labor or customers, and what each person
expects in terms of profits and ownership. A partnership agreement
can be solidified by an oral agreement between partners, but
experts recommend putting the terms down in writing.
"I liken the partnership agreement to a prenup negotiated before
a marriage," says Barbara Weltman, a tax and business attorney and
author of such books as J.K. Lasser's Small Business Taxes (Wiley
2009). "When everybody loves each other and has the best of
intentions, it's a good idea to work out the 'what ifs.' You want
to decide in advance who is getting what, who is doing what, who is
responsible for what, and how to resolve disagreements -- what
happens if one person wants to retire or one partner wants to
expand and the other doesn't?"
The following pages will cover the benefits and disadvantages of
a partnership, how to structure a partnership in a written
agreement to protect yourself and the business, and steps you need
to take in forming a partnership.
Why Form a Partnership?Once you have an idea for a company,
whether this means selling a product or a service, understand the
consequences of opting to become a partnership. As a business
partner, you need to be prepared to devote time, use business
methods, and get set up properly so you can make more money,
minimize taxes, and generally avoid potential problems. Here are
the pros and cons of forming a business partnership:
Benefits of a partnershipThis type of business entity is easy
and inexpensive to set up. There are no formal or legal steps
required in forming a partnership, unlike forming a corporation,
for which you have to file with your state government. As long as
you join with at least one other person and have the intention of
making a profit from your business, you are automatically a general
partnership, Weltman says.Filing income tax returns is easy. A
general partnership is a "pass through" entity, meaning the
partners -- and not the partnership -- are taxed individually. That
means that the partnership return is merely an information return,
telling the IRS about the partnership's income and expenses; the
partners pay tax on their share of partnership income on their
personal returns.
It's a way to attract prospective employees or "talent." A
business potentially can reach new heights when complementary skill
sets are gathered under a partnership. A partnership can also serve
as an incentive to attract new employees if they realize they may
become partners at some point.Disadvantages of a partnership
Perhaps the biggest drawback is that each partner is jointly and
severally liable for the debts and obligations of the business. "A
creditor can sue a single partner for all of the partnership debt
owed and this partner is responsible for paying the full amount to
the creditor," Weltman says. Once a partner pays off the creditor,
he or she can seek "contribution" from the other partner(s).
All your personal assets are potentially at risk. This is why
some attorneys, such as Cliff Ennico, nationally syndicated small
business columnist and author of Small Business Survival Guide
(Adams Media 2005), suggest that you are better off incorporating
your business or forming a limited liability company (LLC) rather
than structuring it as a partnership. Incorporating can help shield
personal assets if your business is sued, or if your business
partner is sued.
Any asset you contribute to the partnership is jointly owned by
you and your partners, and there's no assurance you will get it
back when the partnership is dissolved.
Profits that a business makes under a partnership must be shared
with others.Unlike in a corporation, you may not be able to deduct
some employee benefits from business income on tax returns.
Any time you share decision-making responsibilities with other
parties; there is the potential for disagreements. Partners are
co-owners and that means they share management and financial
control over the business.Dig Deeper: The Pros and Cons of Business
Partnerships
Structuring a Business Partnership: Who Qualifies?The first step
you need to take in forming a business partnership is to figure out
who is in the partnership. Partnerships can be formed with two or
more partners, although Ennico points out that partnerships with
large numbers of partners (more than 10) can become unwieldy to
manage. Professional firms with 50 or more partners have extremely
detailed agreements spelling out rigid procedures over who gets
admitted, who signs the lease, the structure of the partnership,
etc. "It can get very involved," Ennico says. Partners can include
employees, spouses, family members, or associates. There may be
reasons arguing against including a spouse as a partner; for
example, if you transfer title to your personal assets into your
spouse's name to protect your personal property in the event the
partnership is sued, the spouse cannot have any involvement in the
partnership business whatsoever, according to Ennico.
If you are teaming up with someone else to perform services for
a mutual client (for example, a website developer who subcontracts
the design work to another consultant) and do not with to make that
person your formal business partner, make sure the other person
signs an agreement stating clearly that they are not your partner
or agent. Ennico further recommends that you notify the client in
writing or by e-mail that you are NOT in partnership with that
person. Otherwise, Ennico says there's a risk the client may view
you as partners and will hold both of you accountable as such if
something goes wrong.
Structuring a Business Partnership: General or Limited?There are
two types of partnerships. Which one is the right kind for you?
General partnerships are formed when two or more people agree to
enter into business together to make a profit. You don't even need
to put anything in writing (although you should) or file any type
of notice with state or local authorities. The feature that
distinguishes this from other business arrangements -- and makes it
a dangerous business form -- is the joint and several liability of
the partners. That means each partner is liable for any debts of
the partnership or of any partners on behalf of the business. "Try
to avoid forming a partnership," Ennico says. "The operating
agreement for a Limited Liability Company (LLC) contains almost all
the same provisions as a partnership agreement, and the cost is
about the same."
Limited partnerships are a variation, in which a business
partnership is comprised of at least one general partner and one
limited partner. "The limited partner gets this name because he or
she enjoyed limited personal liability," Weltman says. "The extent
of exposure for partnership debts is essentially the limited
partner's investment in the partnership." The limited partner is a
silent partner, contributing money to the venture but without any
right to direct how it operates or otherwise being involved in the
running of the partnership business. Also, a limited partnership
can only be formed by creating a formal agreement in accordance
with state law and filing certain documents with your state
Secretary of State's office. In a handful of states, you may also
need to publish a "notice of formation" in local newspapers.Dig
Deeper: How to Choose the Right Legal Structure
Structuring a Business Partnership: Writing a Business PlanWhile
this exercise is not mandatory, it is extremely helpful to ensure
success of a partnership. "The plan serves as a roadmap for the
partnership to implement actions necessary to start up and grow the
company," Weltman says. "It also is useful in making you focus on
various aspects of the business, such as where you plan to obtain
start-up capital and whether you will be selling through the Web."
A business plan should describe the responsibilities of each
partner for the business, including who will be the head or
managing partner.
Structuring a Business Partnership: Choosing a NameFinding the
right name for your business can describe what the business is all
about. "Frequently, the fact that the business is a partnership is
explained by the name, such as Wang and Williams Associates," says
Weltman. "Other times, the name may relate to the product or
service being offered by the partnership." After choosing the name,
you need to protect it. Do this by making sure a suitable Internet
domain name is available for your partnership, as most businesses
these days should establish a website. Even if you don't set up a
website immediately, reserve the name by registering your site.
Check availability of the name you want to use through Register.com
or other domain name providers. You will also need to register your
partnership name with a local government, for which there is
usually a modest fee. And while it's not required, it's often a
good idea to gain legal protection for your partnership in the form
of a trademark. Learn about trademark protection from the U.S.
Patent and Trademark Office.
Structuring a Business Partnership: Understanding Your Tax
ObligationsA business partnership does not pay taxes on income. The
partnership is a pass-through entity and the individual partners
pay tax on their distributive share of partnership income passed
through to them. Each year, the partnership files a return, Form
1065, to report to the IRS the income, gains, losses, deductions,
and credits from the business, Weltman says. It also files a
Schedule K-1 for each partner, allocating a share of each item of
income, deductions, etc. according to the terms of the partnership
agreement. Similar reporting may be required at the state
level.
Each partner reports his or her share of income on Schedule C of
his or her personal income tax Form 1040. If the partnership is
profitable, each partner must pay self-employment taxes on his or
her net earnings. These taxes cover the employer and employee share
of Social Security and Medicare taxes. Because a partner is not an
employee (a partner is a self-employed person), there is no
withholding from a paycheck to cover income and self-employment
taxes. Instead, these taxes are paid through quarterly estimated
tax payments.
There are special rule for husband-wife ventures. If a married
couple operates a venture in which each materially participates and
they file a joint return, they can opt not to file Form 1065.
Instead, they can file a single Schedule C (the form used by sole
proprietors) to report their share of business income and
expenses.
Structuring a Business Partnership: Other DetailsWeltman says to
make sure to deal with various other business matters before your
partnership begins operations:
Obtain a federal employer identification number. A new
partnership must obtain a federal employer identification number
(EIN). This can be done instantaneously and at no cost from the
IRS. When partners exit the partnership, or new partners are added,
your partnership may need to obtain a new EIN as it is considered a
"new" partnership for tax purposes.
Obtain licenses and permits. Depending on your type of business,
the partnership and/or each partner may be required to have a
license or permit to operate legally.
Choose a location. Decide the "official" address for the
partnership. With technology enabling partners to work from remote
locations, it is helpful to designate one place to receive
partnership mail. If partners operate from their respective homes,
the partnership can obtain an address from such companies as a UPS
Store or a virtual office.Obtain insurance. Because each partner's
personal assets are exposed to the claims of the partnership's
creditors, the best way to obtain protection is to carry adequate
insurance for the unexpected. Discuss these and other types of
coverage with an insurance agent: property and liability coverage,
auto insurance, and health coverage.Structuring a Business
Partnership: Writing the Partnership Agreement
General partnerships can be informal, oral arrangements to share
profits and losses of a business venture. However, it is highly
advisable to use a formal, written partnership agreement to spell
out how income, deductions, gains, losses, and credits are to be
split. If the agreement is silent, then state law is used to fill
in gaps -- and that could leave a lot of decisions up to the courts
if you and your partner(s) have a falling out.
"Legally, you're not required to have a written partnership
agreement but I think you're a fool not to have one," Ennico says.
"If you don't have a written agreement, a judge looks at the
partnership statute and that acts as your agreement."
That may be fine. But it may also not be so good, Ennico says,
because the partnership laws in many states assume that all
partners are equal. "If we set up a partnership on a handshake and
agree to split the business 70-30, and we then have a falling out
because you think you are working harder than I am and deserve a
bigger share of the profits, the law may say we are 50-50 partners
unless we can clearly document in writing, for example a signed
Form 1065, our intent to create an unequal split," Ennico says.
Laws vary by state. There are sample partnership agreements
available on legal websites on the Internet, such as Law Depot and
LegalZoom. But a partnership agreement can be put in writing by a
lawyer for between $500 to $1,000 and that might very well be worth
the investment to your business, Ennico says. "Never undertake a
partnership agreement without an attorney," he says. "I once
handled an agreement involving a 20-member engineering firm that
consisted of 90 pages plus schedules. It took more than six months
for the partners to reach agreement on all the details."
Here are some critical elements to include in a partnership
agreement:1. Partnership information. List the name of the
partnership, location, when it was formed and the purpose of the
business. Who the partners are and their capital contributions
Determine who the partners are and list them, their addresses, and
Social Security Numbers. Then detail what the partners are putting
into the partnership. These contributions may include money,
intellectual property, customers, machinery, vehicles, etc.
2. Profit and loss distribution.Each partner's "distribution
percentage" reflecting their share of partnership profits and
losses must be clearly stated in the agreement. Partners share in
the profits and losses to the extent of their share in the
business. If each contributes 50 percent of the start-up money,
then each is entitled to 50 percent of the profits, according to
Weltman. Ennico adds, "distributions of profit must be made in
accordance with the partners' percentages if you don't do that,
there's a risk that the partnership tax laws may rearrange your
percentages to reflect how much money you and your partners are
actually taking out of the partnership checking account.
3. Rules concerning voting, admitting new partners, and
management.Determine who is going to manage the partnership, who
can sign contracts, and whether partners are going to be receiving
salaries for labor or services. "Unlike distributions of profit,
salaries do not have to be made proportionately to the partners,"
says Ennico. "I frequently see situations where unequal partners
decide to take equal salaries for the work they're doing to further
the partnership business." You also need to determine the voting
rights of the partners -- normally a simple majority vote of the
partners decides what happens and what doesn't, but you can agree
that important decisions be made by a "supermajority" vote of
two-thirds or more of the partnership percentages.. "For example,
many partnership agreements require that the partners be unanimous
when deciding to admit new partners, merge with another company,
sell part of their business, or make a bankruptcy filing," says
Ennico.
4. The exit strategyThe most important thing to spell out in a
partnership agreement is your "exit strategy" if things don't go as
planned and you want to get out of the partnership. "The dirty
little secret is that as long as everybody gets along and everybody
communicates and everybody does what they're supposed to, no one
will look at the partnership agreement again," Ennico says. "The
only time anyone is going to dust off the agreement and run to an
attorney is when they are unhappy and want out."
This section details how to dissolve the partnership the
circumstances under which partners can withdraw, how much notice
they must provide, and how the assets will be distributed. This
section may also deal with other issues, such as what happens if
one partner retires, goes bankrupt, becomes disabled, or dies. When
such events occur, the departing partner's share of a business
doesn't automatically get divided between the remaining partners.
It is an asset that may be transferred by law to someone (such as a
deceased partner's heirs, or to the partner's ex-spouse in a
divorce proceeding) that you don't want to be partners with. If you
don't want to be a partner with that "someone else", you may want
to insist on a buy/sell clause that specifies that the surviving
partners have the right to buy out that "someone else" in the event
of a partner's death, disability, divorce, bankruptcy or
retirement. If you do this, you should specify the method of
determining the value of the departing partner's share.
Ennico says your partnership agreement should clearly state "who
gets what" when the partnership dissolves, and spell out rules for
what the partners can and cannot do afterwards: "for example, can
you still talk to your old customers? Can you take your customers
with you? Are you prohibited from doing a similar business in the
same geographic area as the partnership? All these things can and
should be spelled out."
5. The means of dispute resolution.In the event that partners
have disagreements, you may want to include in your partnership
agreement how those agreements will be worked out. You may want to
specify that partners bring disputes to mediation before
arbitration, go to arbitration directly, or agree to only go to
arbitration.
Dig Deeper: Why Partnerships FailStructuring a Business
Partnership: Recommended ResourcesBusiness.gov: Link to your
location to find applicable requirements.Cliff Ennico, the small
business attorney quoted in this article, has an excellent outline
on the advantages and disadvantages of forming partnerships, LLCs
and corporations, entitled "Demystifying the Business
Organization," which is available without charge on his
website.Internal Revenue Service: View IRS Publication 541,
Partnerships, for guidance on partnership taxation.U.S., Small
Business Administration: How to choose a business structure.
Partnership Basics14 SHARES
A partnership is an association of two or more persons, known as
general partners, who act as co-owners of a business and operate it
for profit. The other two major forms of business are a sole
proprietorship and a corporation.
Since each state has specific laws on the formation and
dissolution of partnerships, as well as laws regarding the legal
responsibilities of each partner, business owners are well advised
to consult an attorney and a tax accountant before establishing a
partnership.
A partnership is relatively simple to establish and does not
require the same amount of record keeping as a corporation. Another
advantage of a partnership is that income is taxed only once. By
contrast, most corporations are taxed twice -- they pay taxes on
their income, and if there are shareholders, they in turn pay taxes
on the share of the corporation's income that they receive as
dividends.
Partnerships need only file an information return (a form
indicating the partnership's income, expenses, and profits or
losses) with the Internal Revenue Service, but the partnership
itself does not pay taxes. Each partner pays federal, state, and
local taxes on their income from the partnership as if it were
personal income.
The chief disadvantage of being a general partner is that you
can be held personally responsible for another partner's negligence
or carelessness. This means that if your partnership is unable to
meet its financial obligations, you may have to use your personal
assets to pay off debtors, even though you personally may not be at
fault. If the partnership defaults on a loan, for example, the bank
has the right to sue any general partner to collect this debt. If
you own a car or a home, the court may order you to sell that
property and turn the proceeds over to the bank. (If you and your
spouse own the property jointly, the bank is entitled to only
one-half the proceeds.)
Another disadvantage of a partnership is that if one partner
decides to sever the business relationship, then the partnership
generally dissolves. The bankruptcy or death of a partner usually
results in the end of the partnership.
Partnership AgreementOnce you and another person have decided to
form a partnership, you should prepare an agreement. If you plan to
be in business for more than one year, the agreement must be in
writing. If you are planning a short-term business venture, an oral
agreement may suffice, but it is still best to put everything down
on paper to avoid potential misunderstandings and disagreements.
Your partnership agreement should include the following:
The name of the partnership and the names of each of the
partners. A general description of the type of business that will
be conducted. The powers and duties of the partners, including any
limitations or restrictions. The financial contributions each
partner will make. How profits and losses are to be divided. How
partners can leave the business and how new partners can be added.
What steps must be taken to dissolve the partnership.
Limited PartnershipsIf you and another person have all the
necessary business skills but insufficient capital, you might be
better served by a limited partnership -- a business made up of one
or more general partners and one or more special partners with
limited liability. Unlike a general partner, who is personally
responsible for all debts and obligations of the partnership, a
limited partner can lose only the amount of capital he has invested
in the business.A limited partner has relatively little power
within the partnership because he is not allowed to be actively
involved in the management of the business; he is merely a
financial contributor. Nevertheless, he has the right to be
informed of all business matters relating to the company and to
share in its profits. (His profits, like those of a general
partner, are treated as personal income for federal tax purposes.)
If a limited partner starts making management decisions, his status
immediately changes to general partner, and he becomes personally
responsible for any business debts.
Ending a PartnershipAfter a partnership is dissolved, the
partners are no longer authorized to conduct business together. To
formally end the partnership, they must discharge all business
obligations to creditors and divide all assets and any remaining
profits among themselves.Source:Reader's Digest'sLegal Problem
Solver: A Quick-and-Easy Action Guide to the Law, 1994, updated
1998
