Management of Partnership: Everything You Need to Know
Management of partnership can be done by all partners because they have equal rights when it comes to managing it.3 min read
Management of partnership can be done by all partners because they have equal rights when it comes to managing it. Partnerships are technically legal business organizations that have two or more partners who share managerial duties and profits. The two main types of partnerships are general partnerships and limited partnerships.
A general partnership is one with two or more people who formed a business under state partnership laws to function as co-owners of a business. Partners can manage the business and assume liability for the business's debt and other legal obligations.
A limited partnership differs in that it has both general and limited partners. The general partners are the ones who assume liability and handle operations, whereas limited partners are investors only. Limited partners have no authority over the business, nor do they have the same liability as general partners.
Management in a General Partnership
Partners in a general partnership all have equal footing and the authority to participate in the management of the business unless there is an agreement that states otherwise. Typically, each partner is granted one equal vote when there is a decision to be made. If the investment capital is not the same, votes are usually weighted in line with the respective capital contributions.
If the business's dealings are complex or numerous, you can draft a partnership agreement where you can create different partner classes, each with its own voting rights. The partners may decide on junior and senior partners, appoint someone as managing partner, or even designate a special management committee that has specific responsibilities and duties. The day-to-day operations may be handled by a committee or managing partners; however, all major business decisions need a partner vote.
If differences over standard business operations develop, they are decided by majority vote, unless there is an agreement specifying a different method. If there is an alternative method, it must be decided on by all members. All partnership agreements need to include a provision for handling deadlocks and state what the course of action will be when there is an impasse.
One option is independent arbitration, and another option is activation of a buy-out clause, which means one partner can resolve the deadlock vote by purchasing another member's partnership interest. If nothing else works, a partner can request to dissolve the partnership based on partnership law in most jurisdictions.
Dissolving a Partnership
Unless an agreement states otherwise, most partnership laws allow partnerships to dissolve when specific events have occurred. These events can include the following circumstances:
- Death of a partner
- Bankruptcy or expulsion of a partner
- Decree of dissolution from the court
- Impossibility to conduct business
Dissolution doesn't mean the partnership's business ceases, only that the relationship between the partners has ended. In the event the partnership plans to cease operations, the next step is “winding things up.” The partnership agreement will then determine how property, assets, and the business are to be disposed of.
Managing Multiple Partnerships
Exclusive partnerships are not always ideal because one partner may feel constrained and start to look for a way to break the deal or find something that gives them additional bargaining power. Typically, much of the dissension is handled behind closed doors, until the matter winds up in court. There are times where an exclusive partnership may be warranted, especially if it's needed to convince another partner to invest. While exclusive partnerships can work, the success rate is low.
While exclusive partnerships aren't necessarily the best path, it's not wise to be promiscuous either. Don't link yourself with random other partnerships, or you will get a bad reputation in the industry. Keep several things in mind when deciding how many partners to have:
- Understand outside needs to support your strategy and identify where you may get them. By understanding the strategic options of partners, you can evaluate whether there is value to exclusivity and what would happen if the partnership broke up down the line.
- Design your partnership so that it can handle any tradeoffs in an exclusive deal. It's wise to leave yourself space to negotiate additional deals if needed, but you don't want to risk losing commitment from your partners.
- Keep a close watch on how you'll get capital value from your selected partners. The team you've built not only needs to be strong enough to play well with others, but also strong enough to beat the other teams in competition.
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