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Things To Know When Entering A Partnership

In 2020, according to the Internal Revenue Service (IRS), the United States was home to more than four million partnerships, a type of business structure that presents several advantages, including the ability to pool resources and enhance the company’s overall skillset. That said, the recommended approach is not to make a rash decision but to consider various elements of the partnership beforehand, including the number and identity of the business partners and how to split the responsibilities, profits, and losses. 

Read about the main things to know when entering a partnership and discover how a New York business litigation attorney from Schwab & Gasparini can aid partnerships by calling their Syracuse office at (315) 422-1333, their Albany office at (518) 591-4664, or their Hudson Valley or White Plains office at (914) 304-4353.

Partnerships Explained

The IRS defines a partnership as an arrangement whereby two or more individuals decide to operate a business together. In these firms, each partner contributes labor, property, skills, and money while sharing the company’s profits and losses, regardless of whether a formal partnership agreement exists.

Both partners file annual returns to report the company’s income, losses, gains, and deductions. However, rather than each individual paying income tax, the business passes these profits or losses through to the partners, who then note their share of the company’s profit or loss on their own tax return. In this sense, they do not act as employees.

What Are the Different Partnership Types?

Business partnerships are classified according to their distribution of liability and their tax filing requirements. Below is more information concerning the three primary partnership types for profit-making enterprises.

General Partnerships

This kind of arrangement occurs when all the partners equally share the business’s financial and legal liability. Crucially, any debt responsibility extends beyond their initial investment.

Limited Liability Partnerships (LLPs)

Popular among professionals, this structure limits each party’s liability. This means the other partners’ personal assets are safe if someone files a lawsuit against one of the partners or if the firm cannot afford to repay its debts.

Limited Partnerships

In this structure, one individual is a general partner. This individual is personally responsible for the company’s debts. The remaining person or persons, known as the silent partner(s), will have limited liability and typically will not participate actively in the business’s day-to-day operations or management.

What Are the 5 Rules of Partnership?

Like most cooperative endeavors, business partnerships tend to run more smoothly when all involved share a set of agreed-upon rules of engagement. Five of the most recommended rules for partnerships include:

Remember Why the Partnership Formed

Effective partnerships occur when all partners share the same goals. Remembering the reason for starting the business in the first place can provide the required energy and commitment to succeed.

Choose Suitable Partners

Good business partners are typically compassionate people who can provide complementary skills. For example, one partner with exemplary networking skills but needing a business idea could complement another person with a strong company concept but poor social skills.

Focus on Goals

This involves developing short-term, realistic, and flexible milestones that can help drive business momentum. The focus on achieving these goals may be more sustainable when the goals are explicitly stated and when all partners agree on their prioritization.

Address Commitments

Successful partnerships usually consider their long-lasting commitments, such as building trust among consumers, suppliers, and the wider industry. Commitments should ideally reflect the ethos of the partners individually and the business entity.

Plan How To Collaborate

Aim to be authentic, communicate openly and honestly, and develop a shared understanding of the company and its vision. Touching base frequently, checking in with updates when nothing is wrong, and soliciting regular input from the other partner(s) can all be effective techniques for fostering effective collaboration as a business grows.

Find out more about the considerations when entering a partnership and see how a seasoned New York business litigation lawyer can assist these kinds of firms by getting in touch with Schwab & Gasparini.

What To Consider Before Entering a Partnership

The following are things to take into account when initiating a partnership:

• Values: Common ground between the partners typically improves the chances of the business succeeding, so select a partner that shares values that extend beyond making a profit. A partner who is passionate about sustainability may benefit from partnering with someone else who shares this view but contributes a different skill set. The two partners can then focus the company’s direction on this topic.
• Responsibilities: Be sure to define each partner’s responsibilities and identify how all the parties can contribute in terms of skills, labor, and capital.
• Trust: Often, individuals can determine whether a potential business partner is trustworthy by assessing their background, having conversations, and using their intuition.
• Expectations: This involves discussing hiring, communication preferences, and styles, the company mission, how to fund the business, decision-making, and conflict resolution.

Questions To Ask When Joining a Partnership

Ask a potential partner the following questions before agreeing to join the partnership to assess their financial background, business acumen, personal interests, and trustworthiness:

• Have you acted as a business partner before?
• Do you like taking risks?
• What are you trying to achieve with this partnership?
• What drives you?
• How would you like to split the profits?
• What is your ideal exit strategy for this partnership?
• How many hours a week are you planning to spend on this business venture?
• What unique skills can you offer that can benefit the business?
• What kind of capital can you contribute to the firm?

What Are 4 Details You Will Find in a Partnership Agreement?

Alongside outlining which partner can bind the company to a contractual agreement, such as a loan, and how the company intends to handle a party’s departure from the business, four of the key details often found in partnership agreements include the following:

• Ownership percentage: Each partner usually contributes some form of capital when joining the partnership. In many cases, these contributions dictate the ownership percentage possessed by each of the partners.
• Profit and loss division: Common options include splitting to align with their ownership percentage or equally sharing the profits and losses. Typically, the agreement also states when partners may withdraw profits from the company.
• Partnership length: Partnerships might have indefinite lengths, or they could end once the company achieves a specific goal.
• Disputes and decision-making: This section of the agreement covers possible mediation clauses for resolving disagreements without involving the courts and may include elements that prevent a single partner from having more power than the other.

Contact a New York Business Litigation Attorney Today

Even when the partners have the same values, writing up the terms instead of relying solely on a spoken agreement can help protect all parties’ interests and the overall business. Consider reaching out to a lawyer to gain assistance with constructing an effective partnership agreement. 

Learn more about the key things to know when entering a partnership and explore how a New York business litigation attorney from Schwab & Gasparini can address your legal concerns by calling (914) 304-4353 for their White Plains or Hudson Valley office, (315) 422-1333 for their Syracuse location, or (518) 591-4664 for their Albany branch.

 

Wed Nov 15 2023, 12:00am