Everything You Need to Know About Equity Partner in Business
To understand equity partner in business, you first need to take a close look at what a partnership is.3 min read
2. How Are Partners Differentiated From One Another?
3. Difference Between a General Partner and a Limited Partner
To understand equity partner in business, you first need to take a close look at what a partnership is. A business that is deemed a partnership is potentially quite unique. It means it has at least two owners, and possibly even thousands.
Being a partner in a business means that you share in both the good times and the bad times. You legally own part of the company, which is especially advantageous if the company generates a lot of revenue, but this is not always the case. The exact terms of the partnership can be found in the partnership agreement that was signed when the partnership was formed.
How Is a Partnership Formed?
There are two steps that must be followed to form a partnership:
- Register the partnership according to the state laws where the business is located.
- Create a partnership agreement that outlines what each partner is responsible for; this agreement should also detail the various types of partners that the business has and how they are to be paid. Furthermore, it should state how changes in the partnership can take place.
Many times, some partners in a partnership will desire to have different roles from the other partners. If this is the case, the roles should be clearly outlined when the partnership is formed. For example, some partners may want to contribute a much higher amount of money than the other partners. And you may find some who wish not to contribute any money at all but want to take on an administrative role for a salary.
You will also find that some partners have no problem taking on a large amount of responsibility and liability, while others prefer to remain less involved in day-to-day operations, sit back on the sidelines, or just have less liability.
It's important to note, however, that when a partnership is formed, this means all partners are in one way or another liable for the actions of all the other partners, and the debt of the company also falls on everyone's shoulders. Regardless, a partnership means that everyone involved contributes in some form, whether it be when the firm was established or when a specific partner joins.
Also noteworthy is that the amount of money a partner contributes usually plays a role in how much ownership he or she has. The higher the contribution, the higher the percentage of ownership. Still, the percentage of ownership does not impact a partner's individual liability for other partners.
How Are Partners Differentiated From One Another?
One way partners can be differentiated from one another is by giving them different roles within the company. Some are responsible for administrative tasks, while others handle customer service or product development. The more responsibility a partner has within a company, the more liability he or she also has.
There are also various departments within the company that different partners may work in. For example, one partner may be responsible for the manufacturing department's finances, while another partner is solely responsible for payroll.
You will also find some companies are formed by partnerships that have different levels. The partners in these types of companies are recognized by their position. A large company, for example, may have a managing partner who is tasked with overseeing day-to-day operations. This type of person is commonly referred to as a CEO. Lower-level positions are often referred to as associate or junior partners. In some companies, even senior partners are considered lower level.
Difference Between a General Partner and a Limited Partner
If you are a general partner, this means you help with the daily operations and you are also personally liable for the partnership. On the other hand, if you are a limited partner, this means you own a percentage of ownership in the company but you do not partake in its managing activities.
If you are a limited partner, your original investment in the company is all you can be held financially responsible for in the event of a lawsuit or if the company dissolves. This is why many people prefer to be a limited partner rather than a general partner. Often, limited partners are referred to as "sleeping partners" because no one even knows they are involved in the company. Because they don't contribute on a day-to-day basis, it's not uncommon for their ownership to go unrecognized.
If you need help with becoming an equity partner in a business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.