How to Manage a Small Business With a Family

PARTNERSHIP

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Photo by: Yuri Arcurs

In the words of the Uniform Partnership Human activity, a partnership is "an clan of two or more persons to carry on as Co-owners of a business for profit." The essential characteristics of this business organisation class, and so, are the collaboration of ii or more than owners, the conduct of business organization for profit (a nonprofit cannot be designated as a partnership), and the sharing of profits, losses, and assets by the joint owners. A partnership is not a corporate or split up entity; rather it is viewed as an extension of its owners for legal and tax purposes, although a partnership may ain holding as a legal entity. While a partnership may exist founded on a simple agreement, even a handshake between owners, a well-crafted and carefully worded partnership understanding is the best style to begin the concern. In the absence of such an agreement, the Uniform Partnership Act, a set of laws pertaining to partnerships that has been adopted past most states, govern the business concern.

In that location are 2 types of partnerships:

General PARTNERSHIPS In this standard course of partnership, all of the partners are as responsible for the business's debts and liabilities. In addition, all partners are immune to be involved in the management of the company. In fact, in the absence of a argument to the contrary in the partnership agreement, each partner has equal rights to control and manage the business. Therefore, unanimous consent of the partners is required for all major actions undertaken. Be advised, though, that any obligation made by one partner is legally binding on all partners, whether or not they have been informed.

Express PARTNERSHIPS In a express partnership, ane or more partners are general partners, and one or more are limited partners. Full general partners are personally liable for the business organisation'due south debts and judgments against the concern; they can also exist straight involved in the direction. Express partners are essentially investors (silent partners, so to speak) who do not participate in the company's management and who are likewise non liable beyond their investment in the business organisation. Country laws decide how involved limited partners can be in the day-to-day business of the firm without jeopardizing their limited liability. This business class is especially attractive to existent estate investors, who benefit from the tax incentives available to limited partners, such as beingness able to write off depreciating values.

ADVANTAGES OF FORMING A PARTNERSHIP

Collaboration. As compared to a sole proprietorship, which is essentially the same business concern form merely with merely one owner, a partnership offers the advantage of assuasive the owners to describe on the resources and expertise of the co-partners. Running a business organization on your ain, while simpler, tin can also be a constant struggle. But with partners to share the responsibilities and lighten the workload, members of a partnership often find that they have more time for the other activities in their lives.

Taxation advantages. The profits of a partnership pass through to its owners, who study their share on their individual tax returns. Therefore, the profits are simply taxed once (at the personal level of its owners) rather than twice, as is the example with corporations, which are taxed at the corporate level and and then again at the personal level when dividends are distributed to the shareholders. The benefits of unmarried taxation tin can too be secured past forming an S corporation (although some ownership restrictions utilize) or by forming a limited liability company (a new hybrid of corporations and partnerships that is still evolving).

Simple operating structure. A partnership, as opposed to a corporation, is fairly uncomplicated to plant and run. No forms need to be filed or formal agreements drafted (although it is advisable to write a partnership understanding in the event of future disagreements). The most that is ever required is peradventure filing a partnership certificate with a state function in social club to register the business organisation's name and securing a business license. As a issue, the annual filing fees for corporations, which tin sometimes be very expensive, are avoided when forming a partnership.

Flexibility. Because the owners of a partnership are usually its managers, especially in the case of a small business concern, the company is adequately like shooting fish in a barrel to manage, and decisions can be made quickly without a lot of bureaucracy. This is not the case with corporations, which must have shareholders, directors, and officers, all of whom have some degree of responsibility for making major decisions.

Uniform laws. One of the drawbacks of owning a corporation or limited liability visitor is that the laws governing those business entities vary from land to country and are changing all the time. In contrast, the Uniform Partnership Act provides a consistent ready of laws near forming and running partnerships that brand it piece of cake for small business owners to know the laws that affect them. And because these laws take been adopted in all states but Louisiana, interstate business is much easier for partnerships than it is for other forms of businesses.

Acquisition of majuscule. Partnerships by and large have an easier time acquiring uppercase than corporations because partners, who use for loans as individuals, tin commonly get loans on better terms. This is because partners guarantee loans with their personal assets likewise as those of the business. As a upshot, loans for a partnership are subject to country usury laws, which govern loans for individuals. Banks too perceive partners to be less of a risk than corporations, which are only required to pledge the concern's assets. In addition, past forming a express partnership, the business organisation tin attract investors (who will not be actively involved in its direction and who will enjoy limited liability) without having to form a corporation and sell stock.

DRAWBACKS OF FORMING A PARTNERSHIP

Conflict with partners. While collaborating with partners can be a great advantage to a small business owner, having to actually run a business from solar day to mean solar day with i or more partners can be a nightmare. Offset of all, y'all accept to surrender accented control of the concern and larn to compromise. And when large decisions have to be made, such as whether and how to aggrandize the business, partners ofttimes disagree on the all-time course and are left with a potentially explosive state of affairs. The best mode to bargain with such predicaments is to anticipate them by drawing up a partnership agreement that details how such disagreements will be dealt with.

Say-so of partners. When 1 partner signs a contract, each of the other partners is legally bound to fulfill it. For example, if Anthony orders $10,000 of computer equipment, it is as if his partners, Susan and Jacob, had also placed the order. And if their business cannot afford to pay the bill, then the personal assets of Susan and Jacob are on the line equally well as those of Anthony. And this is true whether the other partners are aware of the contract or not. Even if a clause in the partnership agreement dictates that each partner must inform the other partners earlier any such deals are made, all of the partners are still responsible if the other party in the contract (the computer company) was not aware of such a stipulation in the partnership agreement. The only recourse the other partners have is to sue.

The Compatible Partnership Act does specify some instances in which full consent of all partners is required:

• Selling the busigood will
• Decisions that would compromise the busiability to function usually
• Assign partnership property in trust for a creditor or to someone in exchange for the payment of the partnership'southward debts
• Admission of liability in a lawsuit
• Submission of a partnership claim or liability to arbitration

Unlimited liability . Equally the previous case illustrated, the personal assets of the partnership's members are vulnerable because in that location is no separation between the owners and the business. The primary reason many businesses choose to contain or form limited liability companies is to protect the owners from the unlimited liability that is the main drawback of partnerships or sole proprietorships. If an employee or customer is injured and decides to sue, or if the business runs upwards excessive debts, and so the partners are personally responsible and in danger of losing all that they own. Therefore, if considering a partnership, determine your assets that will exist put at risk. If you lot possess substantial personal assets that y'all volition not invest in the company and do not want to put in jeopardy, a corporation or limited liability company may be a meliorate choice. But if you are investing almost of what you own in the business organisation, then you don't stand to lose whatever more than if you incorporated. Then if your business is successful, and yous find at a afterward date that you lot at present possess extensive personal assets that y'all would like to protect, you can consider changing the legal status of your concern to secure limited liability.

Vulnerability to decease or departure. Unlike corporations, which exist perpetually, regardless of ownership, general partnerships dissolve if ane of the partners dies, retires, or withdraws. (In limited partnerships, the death or withdrawal of the limited partner does not impact the stability of the business organisation.) Even though this is the law governing partnerships, the partnership understanding can incorporate provisions to continue the business. For instance, a provision can be made assuasive a buy out of a partner's share if he or she wants to withdraw or if the partner dies.

Limitations on transfer of ownership . Unlike corporations, which exist independently of their owners, the existence of partnerships is dependent upon the owners. Therefore, the Compatible Partnership Act stipulates that ownership may not exist transferred without the consent of all the other partners. (Once over again, a limited partner is an exception: his or her interest in the company may be sold at will.)

CHOOSING A PARTNER

Because of the demand for compromise and the dynamics of shared potency that come forth with sharing a business, partnerships tin exist very difficult to maintain and run efficiently. Therefore, the single most important decision a small-scale business organisation owner has to brand when forming a partnership is the choice of a partner. In fact, warns Edward A. Haman, in How to Write Your Own Partnership Agreement , "you should only take on a partner if you absolutely need that person'due south money or expertise." Every bit an alternative, he advises, you lot could try to "get the money as a loan, or hire the person as a consultant to get the expertise." Just if y'all decide that forming a partnership is the best choice, consider the following when selecting a partner (anyone may go a partner, except minors and corporations):

Assets

• How much does your partner ain in personal assets? If you own much more than your partner, then creditors will come after you in the event of extensive debts.

PERSONALITY

• Practice you possess compatible personality types?
• How do you each deal with stress?
• How do you brand decisions? Does your prospective partner tend to talk things through with others or make impulse decisions?

ROLES

• What part do each of you intend to have in the business concern? Are these roles compatible? Do you lot both hope to be in accuse of the accounts or dealing with vendors, for example? Or tin can you split up up the duties in a fashion that satisfies both of you?

SHARING RESPONSIBILITIES

• How much time will your partner contribute to the enterprise?
• Can y'all count on you lot partner to show up to work on time? Or you volition be expected to cover for him?
• Is your prospective partner a hard worker, or volition he or she routinely go out tasks for you to complete?

GOALS FOR THE BUSINESS

• How do each of yous envision the future of the business organization? Exercise yous hope to build upwards a solid business so expand to other locations? Does your partner share that vision or does he or she promise merely to be able to make a decent living out of one business with fewer responsibilities than would be required if running a chain of stores?

FORMING A PARTNERSHIP

RESERVING A NAME The first step in creating a partnership is reserving a name, which must be washed with the secretary of land's office or its equivalent. Most states require that the words "Company" or "Associates" be included in the proper name to bear witness that more than one partner is involved in the business. In all states, though, the name of the partnership must not resemble the name of any other corporation, limited liability company, partnership, or sole proprietorship that is registered with the state

THE PARTNERSHIP AGREEMENT A partnership can be formed in essentially ii ways: past verbal or written agreement. A partnership that is formed at will, or verbally, tin can besides be dissolved at will. In the absenteeism of a formal understanding, state laws (the Compatible Partnership Act, except in Louisiana) will govern the business concern. These laws specify that without an agreement, all partners share equally in the profits and losses of the partnership and that partners are not entitled to compensation for services. If you would similar to construction your partnership differently, you will need to write a partnership agreement.

It may exist advisable to consult a lawyer before drafting the agreement, merely you should at least research the issue on your own. A thorough partnership understanding should generally cover the post-obit areas:

• Proper noun and address
• Duration of partnership—You can specify a finite date on which all business will finish or you can include a full general clause that explains the partnership will exist until all partners concur to dissolve it or a partner dies.
• Purpose of business organization
• Partners' contributions—These may be in cash, property or services. Be certain to determine the value of all non-greenbacks contributions.
• Partners' bounty—Determine how profits volition be split up up and how often. Also decide if whatever of the partners will receive a salary.
• Management Authority—Will partners be able to make some decisions on their own? Which decisions will require the unanimous consent of all partners?
• Work hours and vacation
• Kinds of outside business activities that volition be immune for partners
• Partner withdrawal—Decide how the expiry, retirement, withdrawal, inability, or death of a partner volition exist handled through a buy-sell understanding. Likewise determine whether or non a partner who has only withdrawn volition be immune to operate a competing business.
• Disposition of the partnership's name if a partner leaves
• How to handle disputes—Decide whether or not mediation or mediation will be provided for in the case of disputes that cannot exist resolved among the partners. This is a mode to avoid costly litigation.

RIGHTS AND RESPONSIBILITIES OF PARTNERS

The Uniform Partnership Deed defines the bones rights and responsibilities of partners. Some of these can be changed by the partnership agreement, except, every bit a general rule, those laws that govern the partners' relationships with third parties. In the absence of a written understanding, so, the following rights and responsibilities apply:

RIGHTS

• All partners take an equal share in the profits of the partnership and are equally responsible for its losses.
• Whatever partner who makes a payment for the partnership beyond its capital letter, or makes a loan to the partnership, is entitled to receive interest on that money.
• All partners have equal property rights for property held in the partnership's name. This means that the employ of the property is every bit bachelor to all partners for the purpose of the partnership'south business organisation.
• All partners have an equal interest in the partnership, or share of its profits and assets.
• All partners have an equal right in the management and conduct of the business.
• All partners take a right to access the books and records of the partnership's accounts and activities at all times. (This does not employ to limited partners.)
• No partner may be added without the consent of all other partners.

RESPONSIBILITIES

• Partners must report and turn over to the partnership whatsoever income they accept derived from utilize of the partnership'south property.
• Partners are not allowed to conduct business that competes with the partnership.
• Each partner is responsible for contributing his or her full time and energy to the success of the partnership.
• Any property that a partner acquires with the intention of information technology beingness the partnership'south property must be turned over to the partnership.
• Any disputes shall be decided past a bulk vote.

FURTHER READING:

Clifford, Denis. The Partnership Volume: How to Write a Partnership Agreement . fifth ed. Nolo Press, 1997.

Edwards, Paul. Teaming Up: The Small-Business organisation Guide to Collaborating with Others to Boost Your Earnings and Expand Your Horizons . Yard.P. Putnam'due south Sons, 1997.

Fay, Jack R. "What Form of Ownership is Best?" CPA Journal. August 1998.

Haman, Edward A. How to Write Your Own Partnership Agreement . Sphinx Publishing, 1993.

Handmaker, Stuart A. Choosing a Legal Construction for Your Business . Prentice Hall, 1997.

Selecting the Legal Structure for Your Business Small Business Administration. n.a.

Steingold, Fred S. The Legal Guide for Starting and Running a Pocket-sized Business . Second Edition. Nolo Press, 1995.

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Source: https://www.referenceforbusiness.com/small/Op-Qu/Partnership.html

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