NFIB

What You Should Know Before Forming a Partnership
04/ 01/ 2002


As John D. Rockefeller once said, "It's better to have a friendship based on a business partnership than a business partnership based on a friendship." What he meant is that forming a partnership is a serious endeavor, and that a partnership must follow strict business principles to become successful. After all, statistics show that well over fifty percent of all partnerships end in failure. (However, statistics also show that partnerships are four times more likely to succeed than sole proprietorships.) Workshop contributor Jeff Moses discusses certain benefits (and drawbacks) that partnerships offer.

-- There are several types of partnerships. A General Partnership consists of two or more people who, unless declared otherwise, are each personally and equally liable for the company's liabilities. A Limited Partnership consists of one or more general partners, each of whom have full and equal liability, and any number of limited partners, who have limited liabilities. Usually, a limited partner's liability is determined by the initial investment in the partnership, but this needs to be drawn up clearly at the time of forming the partnership.

-- Partnerships enable each member to share work and costs, with less total up-front expense than when forming a corporation. Partnerships are easily converted to corporations as the business becomes more successful. Partnerships in themselves are usually not taxable, whereas corporations are. Individual partners within a partnership are usually taxed separately, according to state and federal rates. For complete information about this particular issue regarding partnerships, consult with your attorney or accountant.

-- Each member of a general partnership is legally responsible for the business activities of all other partners. This means that if one of the partners drains the company savings account and heads to Brazil, every other partner is liable for what was taken, along with taxes on the amount and any resulting legal bills. This liability can extend even to damages occurring while one of the partners is at work on partnership business, such as causing an auto accident while driving to a business appointment.

-- When entering into a partnership of any kind, consult a lawyer to draw up a partnership agreement. This won't fully protect against instances mentioned in the last point, but a good agreement will define the expected roles of each partner; determine initial cost outlays of each person; lay out salaries, draws, percentages of profits, etc.; and outline the mission statement or purposes of the partnership. Don't underestimate this final point. Many partnerships flounder when the partners discover they had differing ideas about the direction in which the partnership would head.

-- Ask your attorney or accountant about obtaining partnership insurance. This should go into effect at the same time as the partnership agreement. This insurance will include coverage for many items, including: general liability, personal property coverage (both on and off premises), business liability protection, business interruption, errors and omissions, etc.

-- A general partnership usually terminates upon the death (or incapacity) of any of the members. If partners wish to avoid this, special terms must be included in the initial partnership agreement.

When partnerships are well formed, they bring a dynamic synergy to a business. Partnerships offer a ready-made group of highly interested and motivated consultants, each of whom can contribute expertise, time and finances to the business. Partnerships aren't for every enterprise, or for every person. But when a partnership works, it can be a highly satisfying and financially successful way to begin and carry on a business.

Small Business Sound Off
Does this story hit home?  Share your story with us