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PARTNERSHIP IN BUSINESS PART TWO
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PARTNERSHIP IN BUSINESS PART TWO

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PARTNERSHIP IN BUSINESS PART TWO

Structuring a Business Partnership: Who Qualifies?

The first step you need to take in forming a business partnership is to figure out who is in the partnership. Partnerships can be formed with two or more partners, although partnerships with large numbers of partners (more than 10) can become unwieldy to manage. Professional firms with 50 or more partners have extremely detailed agreements spelling out rigid procedures over who gets admitted, who signs the lease, the structure of the partnership, etc.

Partners can include employees, spouses, family members, or associates. There may be reasons arguing against including a spouse as a partner; for example, if you transfer title to your personal assets into your spouse’s name to protect your personal property in the event the partnership is sued, the spouse cannot have any involvement in the partnership business whatsoever.

If you are teaming up with someone else to perform services for a mutual client (for example, a website developer who subcontracts the design work to another consultant) and do not want to make that person your formal business partner, make sure the other person signs an agreement stating clearly that they are not your partner or agent.

 

Ten Questions to Ask Your Partner (Before You Sign an Agreement)

  1. What will your role in the business be, and what do you expect mine to be?
    The co-CEO game can be difficult, so consider putting one person in charge.

 

  1. How will we split up ownership, how will we divide profits and losses, and how will we each be paid?
    Some experts suggest avoiding a 50-50 ownership split. But if you are equal partners, be careful about giving ownership to an employee–it effectively gives the employee the swing vote in any partners’ dispute

 

  1. How are we going to make decisions?

 

  1. What are your values?
    Yes, it sounds touchy-feely, but there are important issues to be discussed: Will you outsource? Will you employ illegal immigrants?

 

  1. How do you like to communicate?

 

  1. What kind of hours are you planning to keep?

 

  1. What’s your spending style–and what’s your credit rating?
    Remember, lenders are likely to check the credit history of both business partners.

 

  1. Where do you want this business to be in five, 10, and 20 years?
    Make sure you’re aligned on growth plans (including hiring, regional expansion, and so forth) and possible exit strategies.

 

  1. Can I have references?
    You have to know the partner’s personality and business reputation. Check with vendors, check with Google, meet the spouse, meet the family, meet the friends. Go on nonbusiness outings. In other words, date before you commit.

 

  • Now, can you sign this buy-sell agreement?

 

Structuring a Business Partnership: Writing a Business Plan

While this exercise is not mandatory, it is extremely helpful to ensure success of a partnership. “The plan serves as a roadmap for the partnership to implement actions necessary to start up and grow the company, it also is useful in making you focus on various aspects of the business, such as where you plan to obtain start-up capital and whether you will be selling through the Web.” A business plan should describe the responsibilities of each partner for the business, including who will be the head or managing partner.

 

Structuring a Business Partnership: Choosing a Name

Finding the right name for your business can describe what the business is all about. “Frequently, the fact that the business is a partnership is explained by the name, such as Wang and Williams Associates,” the name may relate to the product or service being offered by the partnership.” After choosing the name, you need to protect it.

Do this by making sure a suitable Internet domain name is available for your partnership, as most businesses these days should establish a website.

Even if you don’t set up a website immediately, reserve the name by registering your site. Check availability of the name you want to use through or other domain name providers. You will also need to register your partnership name with a local government, for which there is usually a modest fee. And while it’s not required, it’s often a good idea to gain legal protection for your partnership in the form of a trademark.

 

Structuring a Business Partnership: Other Details

Make sure to deal with various other business matters before your partnership begins operations:

Obtain a federal employer identification number. A new partnership must obtain a federal employer identification number (EIN). This can be done instantaneously and at no cost from the IRS.  When partners exit the partnership, or new partners are added, your partnership may need to obtain a new EIN as it is considered a “new” partnership for tax purposes.

Obtain licenses and permits. Depending on your type of business, the partnership and/or each partner may be required to have a license or permit to operate legally.

Choose a location. Decide the “official” address for the partnership. With technology enabling partners to work from remote locations, it is helpful to designate one place to receive partnership mail. If partners operate from their respective homes, the partnership can obtain an address from such companies as a UPS Store or a virtual office.

Obtain insurance. Because each partner’s personal assets are exposed to the claims of the partnership’s creditors, the best way to obtain protection is to carry adequate insurance for the unexpected. Discuss these and other types of coverage with an insurance agent: property and liability coverage, auto insurance, and health coverage.

 

Structuring a Business Partnership: Writing the Partnership Agreement

General partnerships can be informal, oral arrangements to share profits and losses of a business venture. However, it is highly advisable to use a formal, written partnership agreement to spell out how income, deductions, gains, losses, and credits are to be split. If the agreement is silent, then state law is used to fill in gaps — and that could leave a lot of decisions up to the courts if you and your partner(s) have a falling out.

“Legally, you’re not required to have a written partnership agreement but I think you’re a fool not to have one. “If you don’t have a written agreement, a judge looks at the partnership statute and that acts as your agreement.”

That may be fine. But it may also not be so good, because the partnership laws in many states assume that all partners are equal. “If we set up a partnership on a handshake and agree to split the business 70-30, and we then have a falling out because you think you are working harder than I am and deserve a bigger share of the profits, the law may say we are 50-50 partners unless we can clearly document in writing.

 

Here are some critical elements to include in a partnership agreement:

 

  1. Partnership information.
  • List the name of the partnership, location, when it was formed and the purpose of the business.
  • Who the partners are and their capital contributions
  • Determine who the partners are and list them, their addresses, and Social Security Numbers. Then detail what the partners are putting into the partnership. These contributions may include money, intellectual property, customers, machinery, vehicles, etc.

 

  1. Profit and loss distribution.

Each partner’s “distribution percentage” – reflecting their share of partnership profits and losses – must be clearly stated in the agreement. Partners share in the profits and losses to the extent of their share in the business. If each contributes 50 percent of the start-up money, then each is entitled to 50 percent of the profits.

Distributions of profit must be made in accordance with the partners’ percentages – if you don’t do that, there’s a risk that the partnership tax laws may rearrange your percentages to reflect how much money you and your partners are actually taking out of the partnership checking account.

 

3.Rules concerning voting, admitting new partners, and management.

Determine who is going to manage the partnership, who can sign contracts, and whether partners are going to be receiving salaries for labor or services. “Unlike distributions of profit, salaries do not have to be made proportionately to the partners.

I frequently see situations where unequal partners decide to take equal salaries for the work they’re doing to further the partnership business.”  You also need to determine the voting rights of the partners, normally a simple majority vote of the partners decides what happens and what doesn’t, but you can agree that important decisions be made by a “supermajority” vote of two-thirds or more of the partnership percentages.. “For example, many partnership agreements require that the partners be unanimous when deciding to admit new partners, merge with another company, sell part of their business, or make a bankruptcy filing.

 

  1. The exit strategy

The most important thing to spell out in a partnership agreement is your “exit strategy” if things don’t go as planned and you want to get out of the partnership. “The dirty little secret is that as long as everybody gets along and everybody communicates and everybody does what they’re supposed to, no one will look at the partnership agreement again.

The only time anyone is going to dust off the agreement and run to an attorney is when they are unhappy and want out.

This section details how to dissolve the partnership – the circumstances under which partners can withdraw, how much notice they must provide, and how the assets will be distributed. This section may also deal with other issues, such as what happens if one partner retires, goes bankrupt, becomes disabled, or dies. When such events occur, the departing partner’s share of a business doesn’t automatically get divided between the remaining partners. It is an asset that may be transferred by law to someone (such as a deceased partner’s heirs, or to the partner’s ex-spouse in a divorce proceeding) that you don’t want to be partners with. If you don’t want to be a partner with that “someone else”, you may want to insist on a buy/sell clause that specifies that the surviving partners have the right to buy out that “someone else” in the event of a partner’s death, disability, divorce, bankruptcy or retirement. If you do this, you should specify the method of determining the value of the departing partner’s share.

Your partnership agreement should clearly state “who gets what” when the partnership dissolves, and spell out rules for what the partners can and cannot do afterwards:   “for example, can you still talk to your old customers? Can you take your customers with you? Are you prohibited from doing a similar business in the same geographic area as the partnership?  All these things can and should be spelled out.”

 

  1. The means of dispute resolution.

In the event that partners have disagreements, you may want to include in your partnership agreement how those agreements will be worked out. You may want to specify that partners bring disputes to mediation before arbitration, go to arbitration directly, or agree to only go to arbitration.

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