Forming a Business Partnership: Everything You Need to Know
Forming a business partnership can seem daunting.3 min read
2. What Is a Limited Liability Partnership?
3. How to Start a Business Partnership
Forming a business partnership can seem daunting. A general partnership is the standard form of a business partnership, and it is when all parties are equally responsible for the business's debts, liabilities, expenditures, and management -- as well as assets.
What Rights Does Each Partner Have in a General Business Partnership?
- All general partners are equally responsible for the profits and losses of the business
- Any partner who makes a payment from his/her personal funds for the business has the right to receive interest on that money
- All partners have equal rights to the property of the business, which means that property is equally available to each partner for the purpose of the business
- All partners have an equal interest or share to the profits and assets of the business
- All partners have an equal say in how the management and overall conduct of the business is operated
- All partners have a right to access the financial records and business account activities at all times
- No additional partners may be added without the consent of all current partners
What Is a Limited Liability Partnership?
In a Limited Liability Partnership, there is a separation between general and limited partners, but both types work in conjunction with each other.
As stated above, the general partners are all equally responsible for the overall management of the business as well as its debts and liabilities. However, limited partners are primarily investors or "silent" partners, if you will. They do not have a stake in the how the company is managed, and do not have a personal financial liability beyond their initial investment.
In short, state laws determine how much a limited partner can be involved in the daily operations and management of the business without comprising their limited liability status.
How to Start a Business Partnership
Forming a powerful partnership can provide a level of effectiveness that other types of business organizations can hardly compete with. However, there are risks involved when setting up a partnership that is unique to each organizational structure.
If you are thinking about starting a business partnership, you need to consider the costs and benefits pertaining to your firm's particular structure, as well as how the partnership forming process works. Considered the following steps:
- Choose Your Partners Wisely -- Just like you wouldn't want to rush into marriage with someone you hardly even know, you definitely don't want to hastily form a business partnership with someone you haven't taken the time to get to know inside and out. Your prospective partner(s) should have financial resources, connections, or specific skills that you lack that can compliment your own.
- Identify Expectations Upfront -- Make sure that each partner is fully aware of their particular duties, responsibilities, as well as the roles that they are expected to uphold within the partnership agreement. This is to ensure that each party is compatible with each other and have similar interest and values.
- Register Your Partnership -- If you are pursuing a Limited Liability Partnership you are required to register with your state registers office. If you are considering a General Partnership you are not usually required to register with your state office, but there are some types of business that are required to register with the federal government, such as alcohol, tobacco, and firearm companies.
- Establish a Federal Tax ID Number -- This number is essentially the "social security" number of your business entity. Just as you have to file your personal income tax under your social security number, your business will also have to file taxes under its Tax ID number.
- Obtain Licensing -- Most types of businesses are going to require state or local business license. The best way to determine what kind of permit or license your business is going to need is to contact your local registers office.
- Open a Joint Business Account -- This is where you will deposit revenue monies, as well as pay bills on behalf of the company. All General Partners should have access to this account. Talk to your banker about what restrictions should be put in place when it comes to making large withdraws and whose signatures should be required to do so.
Once you have completed the above steps, it's time to get to work serving your customers/clients. Each business may require additional steps or requirements that are specific to that business, but these are the six universal steps that need to be taken into account regardless of what business venture you are forming.
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