Partnership for a term secures partnerships for specific duration of time, or until a specified event takes place. These types of partnerships may be dissolved prematurely by any partner involved. However, if someone dissolves a partnership prematurely, they may be held liable for breach of contract.

By definition, a partnership is a formal arrangement where two or more parties come together to operate and manage a business. Numerous partnership arrangements are available. In some cases, partners will share profits and liabilities equally. In other cases, certain partners will only carry a limited amount of liability.

Sometimes, you may even discover a business has a silent partner or someone who isn't involved in day-to-day operations and management. For some, partnerships will be subject to more favorable tax options than corporations.

What Is a Partnership?

In its broadest sense, a partnership encompasses any arrangement in which multiple parties seek to cooperate together. These parties may include individuals, businesses, non-profit organizations, the government, or any combination of such. The goals of partnerships can vary greatly.

While not every partnership comes with an agreement, it's certainly advisable. It's a good idea to set specific terms at the beginning of an arrangement so disagreements can be mediated according to a set of already-established rules.

Types of Partnerships

When a for-profit venture is undertaken, there are three main categories for partnership. They are:

  • General Partnership
  • Limited Liability Partnership (LLP)
  • Limited Partnership (LP)

It's important to note that partnerships are more costly than sole proprietorships because they require more accounting and legal services.

General Partnerships

Typically, general partnerships require everyone to share equal amounts of legal and financial liability. Each individual is responsible for any debts the partnership may incur. This means profits should also be shared equally.

The specific details of profit sharing should always be laid out in a partnership agreement. In general partnerships, each member should be able to act on behalf of the partnership, with an ability to secure loans or make decisions that will impact all partners and be binding.

Limited Liability Partnerships

Limited liability partnerships (LLP) are favored among accounting, architecture, and law firms. This type of arrangement limits each partner's liability. One of the primary reasons for this type of structure is that, if one partner is sued for malpractice, as an example, the other partner's assets won't be at risk.

Some accounting and law firms take things a step further and draw a clear line between equity and salaried partners. Salaried partners hold more senior positions than associates, but don't necessarily require a stake in ownership. You may find that these kinds of partners are paid out in bonuses, based on the firm's profitability.

Limited Partnerships

Limited partnerships (LP) are a good mix of general and limited liability partnerships. In this arrangement, at least one partner must be a general partner. That means they will accept full liability for any debts incurred. Additionally, at least one partner's liability must be restricted to the amount invested in the partnership.

Limited partnerships require high-level administrative and filing complexities. As such, they're not generally recommended for new business ventures. If you're looking at two partners who wish to be actively involved in day-to-day operations and management, you may want to consider a general partnership. It will be easier to form.

Partnership Agreements

The most crucial element to any new partnership is a formalized agreement. Without an agreement, if something happens to one of the partners, the entire organization could be placed in jeopardy.

A proper agreement will set out all the terms that were agreed upon by each party. It's wise to consider every contingency. While it's true all agreements will differ, there are certain terms that should always be included. They include:

  • The length of the partnership
  • The percentage of each party's ownership
  • The division of profit and loss
  • The withdrawal of a partner
  • Dispute resolution
  • Decision-making procedures
  • Partnership authority

Establishing a business with a couple of friends over a handshake is never advisable, especially in such a litigious world. The goal of a sound partnership agreement will always be to ensure each partner maintains proper protection.

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