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The Basics of Partnerships

By: Buffie Edick

 

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Partnerships consist of an association of two or more persons who assume co-ownership of a business for profit. While partnerships are relatively easy to set-up, there are some basic tips that if followed can lead to a long-lasting and rewarding partnership.

  1. Know Your Particular State’s Law Regarding Partnerships. Laws pertaining to partnerships vary state-to-state, so seeking the advice of a lawyer prior to forming this type of working relationship is always a good idea. 
  2. Partnerships are Relatively Easy to Form. Partnerships can begin with the simplest of ideas. Take for example the neighborhood lemonade and popcorn stand your children and the kids next door decide to open one summer. By setting up this “business” the youngest of entrepreneurs in the area have formed a partnership. Partnerships require little paperwork and have no annual meeting or filing requirements. 
  3. Partnerships Benefit from Easier Tax Laws. Partnerships themselves are not taxed, rather, the partners only have to pay taxes on their individual income. This differs from a corporation which is often taxed on annual income as well as any shareholder’s dividends. 
  4. You Can Be Held Liable for Mistakes Your Partners Make. In a general partnership, each partner is held responsible for the actions of the other partners on behalf of the partnership. If your partnership can’t meet its financial obligations you can be forced to use your personal finances to repay your company’s debts.
  5. Consider Adding Limited Partners. If your partnership can handle all of the day-to-day aspects of the business but needs financial backing, then having a limited partnership might be the route to pursue. Limited partners have none of the decision making capabilities but do have a right to know what decisions are made as they can pertain to profit sharing.
  6. General Partnerships Can Be Too Informal. Many general partnerships lack formal organization which can lead to irreconcilable disputes in the future. By creating a written document you can avoid many of the disputes over ownership and liability that can occur when there is nothing in written form to lay the groundwork for an organized partnership. If you plan on operating the partnership for more than one year, an agreement must be in writing and should include: 
    • the name of the company
    • the duties of the partners (limitations and power)
    • a description of the company
    • financial liabilities and responsibilities of the partners
    • ways the partnership can be dissolved and new partners can be added
 

Partnerships can be formed easily and have no limitations as to how they come to fruition. From the neighborhood lemonade stand to the corner market, partnerships can be a great way to forge working relationships and turn a dream into a profitable business.

Published: June 19, 2013
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