Forming a Business Partnership

Many entrepreneurs dream of going into business with a friend, family member, or close colleague. This dream can come to life if you decide to form a business partnership.

Going into business with a partner gives partners the opportunity to start a company that they are mutually passionate about. They may play off each other’s strengths and support each other, make decisions, and split profits together. In addition, they may contribute to the greater good of the business.

What kind of business partnership should you start? Let’s take a look at common types of partnerships. Then, we’ll review how to draft a written partnership agreement. Finally, we’ll share the surprising reason why at least one partner in a business partnership needs a tax ID.

General Partnership

The most common type of partnership is a general partnership. In a general partnership, two or more partners establish an agreement for running a company. This agreement allows the partners to equally divide profits, liabilities, and management duties. Each partner in a general partnership is an equal to one another.

However, general partnerships should incorporate their partnership. This is because general partnerships are considered to be unincorporated businesses. They do not have limited liability protection. As such, general partnerships are often seen as a sole proprietorship. Partners may decide to incorporate as a different type of partnership. This may include a limited liability partnership (LLP). Or, they may choose to incorporate as a limited liability company (LLC).

Joint Venture Partnership

A joint venture partnership is a temporary partnership. It is a partnership designed to expire.

Typically, partners choose a joint venture partnership to reach a certain phase. For example, a joint venture partnership may be put into place to speed up certain business processes. Or, it may help complete a phrase of development. Once the phase or process is met, the business partnership expires.

Silent Partnership

Silent partnerships allow partners that wish to be less active in the business the chance to step behind the scenes.

In a silent partnership, one partner may quietly provide the business with capital. As such, they are less involved with the company’s day-to-day responsibilities. The other partner, or partners, will assume these responsibilities and divide them accordingly.

Limited Liability Partnership (LLP)

An LLP is similar to an LLC. However, it is for professionals in specific professions. These are roles where the professional is licensed by the state, such as physicians, accountants, and dentists.

An LLP protects partners in licensed professions from consequences that may stem from the negligence or malpractice of one partner. Like an LLC, an LLP also provides its professionals with limited liability protection. The laws for the LLP structure vary from state to state, so be sure to check in with your state of incorporation’s local Secretary of State.

Writing a Partnership Agreement

Once you determine which partnership type you would like to incorporate as, it’s time to draft a written partnership agreement. This document covers key details about the partnership. It also allows entrepreneurs to protect the partnership by outlining these specific terms and clauses.

  • Partnership term. This is the official start date. It includes the starting day, month, and year of the business partnership. Generally, most partnerships continue indefinitely. Additionally, you may outline a termination date in the event of a partnership termination.
  • Responsibilities. This section outlines the daily responsibilities, and role each partner plays in the partnership.
  • Capital. This section details each of the partner’s capital contributions. This includes the account the money will be kept in, how and when partners are paid, and terms of profits and losses for each partner.
  • Admitting new partners. This section outlines instructions for how to admit new partners into the business.
  • Voluntary/involuntary partner withdrawal. What if a partner chooses to leave a partnership or involuntarily withdraws from the partnership? Draft terms for what the withdrawal process may look like and if there may need to be a dissolution of the partnership.
  • Death of a partner. What happens if a partner passes away? This agreement outlines the rights of the surviving partner(s).

Obtaining a Tax ID

What role does an employer identification number (EIN) play in a business partnership? The IRS issues these tax IDs to help identify the employer tax account of businesses. Many business owners use their social security number on business documents.

In a partnership, however, this is not feasible. A partnership includes at least two partners, or owners. As such, an EIN must be used and applied for by at least one partner prior to launching a partnership.

Ready to team up with a partner and form a business partnership? Reach out to us at mycorporation.com or call 877-692-6772 for assistance.

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