Advantages of Partnership

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What is a Partnership?

A partnership is a business agreement between partners that establishes certain business practices for a company. A partnership must consist of at least two people, but there is no limit to the number of business partners that can be involved in a partnership agreement .

Partnership agreements are vital to a making sure the day-to-day schedule of a business goes smoothly, since it includes information such as:

  • Who handles business responsibilities
  • Ownership details
  • Investment data
  • Profit and loss statements
  • Company management information

What are the Advantages of a Partnership?

Partnership agreements are advantageous to business owners for a few different reasons. One of the most prevalent of these has to do with money. Since more than one person is involved in the management of a partnership, there is a larger source of capital available to keep the business entity running. This also translates to more room for development since budgets are higher.

Another huge advantage of a partnership deals with the partners. If business owners set out to create a diverse team of experts in different areas of the field, it leads to a more successful business. Joining forces with those who have different strengths than others lead to a more complete team overall.

When it comes to filing taxes, being a part of a partnership certainly has its perks. The form that the IRS requires from partnerships is simple, and unlike with corporations, partnerships cannot be double-taxed, since profits are funneled directly to the owners instead of being viewed as a separate entity from salaries.

Lastly, forming a partnership is generally easier and cheaper than filing for other types of business entities, making it a great option for new companies on a budget.

Here is an article about the advantages and disadvantages of forming a partnership.

Types of Partnerships

When a business files to form a partnership, they must designate what type of partnership they plan to run. There are a few differences in the way that each partnership type is run, so making sure the right designation is chosen is essential to serving needs of the business as best as possible.

General Partnership

A general partnership is the most basic type of partnership agreement. With this type of partnership, all general partners to the agreement share the same percentage of responsibility when it comes to profits, assets, and liabilities.

Limited Partnership

A limited partnership is a variation of a general partnership where a partner’s liability is based upon the amount of capital they contribute to the company. For example, a partner who contributes $100,000 in capital to a partnership is awarded more of the profits. In return, they accept a higher percentage of liability, as well.

Limited Liability Partnership

Limited liability partnerships are like general partnerships, but with a twist. Limited partners still share profits, assets, and liabilities, but in a limited liability partnership, their personal assets are given a certain degree of limited personal liability.

Limited Liability Limited Partnership

A limited liability limited partnership includes general partners and limited liability partners. In this type of partnership, general partners handle running the business. Limited partners, on the other hand, are only concerned with the financial standpoint of the business and do not play a role in operations.

Check out this article to learn more about the types of partnerships out there.

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What to Include in a Partnership Agreement?

Since partnership agreements set out to detail important information about a business and its operations, it’s important that they are as detailed as possible. Paying special mind to ensuring that no important information is left out sets partnerships up for success.

Here is an overview of what should be included in a partnership agreement and why it’s important:

  1. Name of the company : The first thing a partnership agreement should always establish is the name of the company. This is what your customers and competitors will come to know you as, so choose wisely.
  2. Business partner contributions : Successful partnership agreements lay out each partners’ financial contributions in an easy-to-read, simple format. Documenting this information helps business owners make important decisions, such as how to split profits, so take care in making sure this is not left out.
  3. Profit and loss statement : All businesses share one thing in common: profits and losses. Partnership agreements should define how profits are distributed among business partners and who is liable for losses.
  4. Business Partner Authority : Who has the power to make decisions? What is the chain of command in a partnership like? The partnership agreement should answer these questions in depth, describing exact workflows that partners can follow.
  5. Management outline : While it might not be necessary the job duties of every member in a partnership, management duties and responsibilities are required to be described in a partnership agreement. Any time a change is made to these duties and responsibilities, a modification must be filed.
  6. Death or withdraw terms: If a partner dies or decides to leave the partnership, there must be a plan in place for how to move forward. This clause ensures that a specific workflow has been established and will be followed if one of these events occurs.
  7. Welcoming new partners : Businesses these days are rapidly changing. When a business wants to add a new partner to the mix, there must be a procedure to do so. Partnership agreements discuss any applicable procedures in detail to avoid any missteps or problems in the future.
  8. Dispute resolution : A dispute resolution clause describe what can be done when business partners have a disagreement, or a provision of the partnership agreement is violated.

Learn more about the most important aspects of a partnership agreement by checking out this article .

Partnership Frequently Asked Questions

What is the difference between an LLC vs. partnership?

An LLC, or limited liability company , files to become its own separate entity from the owners. Partnerships, however, operate under the names of the owners and is considered one with them. Here is more on the difference between an LLC vs. partnership .

Is filing for a partnership expensive?

When it comes to the partnership agreement cost , most people find the prices very favorable. When compared to other business entity filings, partnerships are considered among the least expensive, which makes them a great option for businesses on a budget.

Should I set up a sole proprietorship or a partnership?

If you wish to file to become a legal business entity with no other parties, you should set up a sole proprietorship, which only includes one person. If you have one or more “partners” that help you with your business and will own a stake in it, setting up a partnership would be more appropriate.

Who can help me set up an accurate partnership agreement?

If you want to set up a partnership agreement quickly and easily, the best course of action you can take is to hire a corporate lawyer. Lawyers are well-versed in the law surrounding partnership entities and have the resources needed to help you.

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