1. What Constitutes a Legally Binding Business Partnership?
2. Types of Partnerships
3. The Legal Ins and Outs of Forming a Partnership

Updated November 10, 2020:

How to make a partnership agreement legally binding is just one of the many concerns that arise in business partnerships. In most cases, a partnership can be made with a verbal agreement and a handshake, but there are many factors to consider. There are also advantages to registering a partnership with the state.

What Constitutes a Legally Binding Business Partnership?

A partnership is a relationship that involves collaboration and a pairing of talents. There are many advantages to having a business partnership. Each partner brings something new to the business and assists others with their shortcomings. Partnerships can also be legally protected when in a limited liability partnership.

A legally binding partnership, however, requires that each partner is assigned specific roles and responsibilities, financial expectations, and future planning expectations for the business. The partnership should also have an agreement as to handling the exit of one of the business partners. Limited liability partnerships should always be registered to take full advantage of the benefits they offer.

The legal requirements for forming a partnership are not as strict as those for forming a business. In fact, legal documents are not always needed to form a legally recognized partnership. Instead, a legally binding partnership is created as soon as two separate individuals begin doing work roles together. In most cases, this is enough to create a partnership. However, it is important to take the necessary steps to protect everyone involved in the partnership.

Partnerships are regulated by state law in the state of the business or partnership. It is important to understand the specific laws regarding partnership in your state, as some states do require registration of the partnership. Some states also require business permits, licenses, and other official documents.

Partners have the following responsibilities:

  • All partners must hold up their side of the business responsibilities, financial payments, and guidelines set when the partnership was created.
  • Both partners are responsible for their share fair of the investment.
  • Each partner will follow all guidelines when acting in the name of the business.
  • Each partner is expected to uphold the duty of loyalty. This means that each partner must always act with the business's best interest in mind.
  • All partners are responsible for the payment of all debts, either with business or personal funding.

Types of Partnerships

It is also important to evaluate the type of partnership. Different partnerships have different expectations and legal liabilities. There are three different types of partnerships to consider.

  • General: In a general partnership, each partner has equal responsibility in business decisions. This is the default type of partnership that will be assumed when legal disputes arise.
  • Limited: Limited partnerships give some partners more control over decisions, while the other partners are considered to be silent partners. This type of partnership is more complex, and partners often do not participate in daily business activities.
  • Limited Liability: Limited liability partnerships divide the financial responsibilities and tasks of the business among active both owners and silent partners. Some partners may be legally protected from liability, similar to a corporate setup. Limited liability partnerships should always be registered with the state to ensure legal protection.

In most states, if there is no legal documentation that supports the existence of a partnership, it will be considered a general partnership. This means that all partners will share the responsibilities and debts of the business. Although none of these partnerships require documentation to form the legal partnership, there are many advantages to doing so.

  • A legal partnership establishes roles and expectations.
  • Members of a legally registered partnership will have supporting documentation in legal disputes.
  • A registered partnership can be used for decision making regarding the current and future practices of the business.

You can learn more about the process of registering a partnership by visiting your state's Secretary of State website.

Partnerships are unique in that they can be legally formed with a verbal agreement and a handshake. However, disputes and questions often arise regarding financial responsibilities and expected activities. A written contract can reduce the chances of legal disputes.

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