How to Structure a Small Business Partnership in 3 Steps
A partnership is a business form created automatically when two or more persons engage in a business enterprise for profit. It is the only business structure that can be created by an oral agreement, though an oral agreement is not recommended. As a business runs its course, owners are sure to have differing opinions which can quickly escalate into disputes--especially if the duties and responsibilities of each partner are not outlined in a specific written agreement.
In order to form a legal, binding, and secure small business partnership, there are a few steps you can take to ensure the happiness and satisfaction of both business partners.
1. Decide which type of partnership you plan to form. There are a few common types of partnerships you can create when starting your small business venture.
- The General Partnership: This is the simplest of all partnerships and is almost always the case with oral agreements. In a general partnership, all partners share in the management of the entity, in the entity’s profits, and in the liability of the business. Matters relating to the ordinary business operations of the partnership are decided by a majority of the partners. In this type of partnership, the two partners may own different percentages of the business and have more or less say in things.
- The Limited Partnership: In this case, the partners contribute capital and share in the profits but normally do not participate in the management of the enterprise. Limited partners incur no liability for debts beyond their capital contribution. The limited partnership is commonly used in the restaurant business, with the founders serving as general partners and the investors as limited partners. A limited partnership generally requires more paperwork and official filings with the state to be recognized. Many businesses choose to form an LLC rather than a Limited Partnership.
- Joint Venture: This acts as a general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.
2. Discuss these important points. You’ll need to make decisions on the following:
- How decisions will be made
- How ownership will be shared
- How and when business owners will be paid
- Develop an exit strategy
- Other details including any personal preferences, employee management, vacation time, office schedules, investments, etc.
3. Hire a professional to take care of the paperwork. While it is legal and perfectly normal for business partners to write up their own documentation of partnership, it is not advised. It’s best to bring in an attorney to draw up the agreement, check with the state on any legal filings that need to take place, and remind the partners of any points that may be missing from their agreement. It generally costs anywhere from $500 to $2,000 to have an attorney draft a partnership agreement for small business owners, depending on the complexity of the arrangement.
Structuring a small business partnership doesn’t have to be complicated, but it is important to be thorough in the agreement in case problems arise in the future. The partnership agreement can be revised as the business evolves, at the consent of both partners.
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FAQs for Structuring a Small Business Partnership:
What are the main types of partnerships for small businesses?
The main types include General Partnership, Limited Partnership, and Joint Venture. Each has distinct features regarding management, liability, and participation.
What key aspects should be discussed when forming a partnership?
Important discussions involve decision-making processes, ownership shares, payment methods, exit strategies, employee management, and other preferences impacting the business.
Is it necessary to hire a professional for partnership paperwork?
While partners can draft their agreement, it’s advisable to involve an attorney for legalities, ensuring completeness, and filing requirements. Attorney fees typically range from $500 to $2,000 based on the agreement’s complexity.
Can a partnership agreement be altered as the business grows?
Yes, partnership agreements can be revised with both partners’ consent as the business evolves. It’s crucial to update the agreement to accommodate changes and prevent future disputes.
What risks are associated with forming an oral partnership agreement?
- An oral agreement lacks legal protection and clarity. Disputes can escalate quickly, as duties, responsibilities, and profit-sharing might not be explicitly defined, leading to potential conflicts.
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