A partnership agreement involves two
or more persons who agree to go into business partnership together
as co-owners. The simplest type of partnership is a
partnership; although, there are other partnership types,
including joint ventures, which are formed for a specific, limited
purpose or for a limited period of time. Limited partnerships
(LPs) are like general partnerships, except that the limited
partners are passive investors and are prohibited from managing
the business. Limited liability partnerships (LLPs) are essentially
the same as limited liability companies (LLCs), except that
an LLP is specifically designed for use by certain professions,
the general partners are not liable for the negligence of other
partners, and the general partners remain liable for the general
obligations of the partnership; whereas, the members of an LLC
are generally not
liable for the debts and obligations of the LLC
The most common reasons for joining with another person to start the business:
There is safety in numbers. In other words,
you have two heads instead of one to discuss and make decisions.
In the words of Solomon: "Two can accomplish more than twice
as much as one. If one fails, the other pulls him up; but
if a man falls when he is alone, he's in trouble. And one
standing alone can be attacked and defeated, but two can stand
back-to-back and conquer. Three is even better, for a triple-braided
cord is not easily broken."
You will not need to be at the business at
all times. You will have someone else who will be there to
share the load and permit you to take a vacation and have
You will also have a highly motivated co-worker,
not just someone who is earning a paycheck.
Partners can also be advantageous when they
have complementary skills.
It may be necessary to have a partner to contribute
capital and share the risk when things do not proceed as planned.
Some of the arguments against having a partner:
Partners have to share the rewards if the
business is successful.
Partners lose total control over the business,
particularly if you and your partner have difficulty in making
You will have to share the recognition that
will come if the business is successful.
A partner can be a disaster if his or her judgment is not
You run the risk of a falling out and perhaps the necessity
of one partner buying the other out if dissention arises.
Some of the things to consider in deciding whether a particular
person will make a good partner are whether you have similar
work habits, similar objectives concerning how to run the business
and whether your strong points are similar or complementary.
For example, different capabilities permit you to spread the
workload and provide better coverage for problems.
Different capabilities may permit you to give each partner a
veto over important decisions in his or her area of expertise
to help maintain stability and eliminate conflicts. Finally,
you may want to consider whether you should have a buy-sell
agreement in the event of a disagreement, and how the purchaser
will pay for the portion of the business he or she is buying
(and whether you should fund the buy-sell agreement with insurance
in the event of the death of a partner).
What Type of Business Organization is Best for You?
Whether you are going it alone or with another person, it is
best to consult a lawyer to determine which form of business
organization will be best for you. Your choices and the benefits
of each form are essentially as follows:
Sole Proprietorship: A sole proprietorship is one person
alone. He or she will have unlimited liability for all debts
of the business, and the income or loss from the business will
be reported on his or her personal income tax return along with
all other income and expense he or she normally reports (although
it will be on a separate schedule). Although proprietorship
avoids the expense of forming a partnership or corporation,
many start businesses this way because they are unfamiliar with
the other forms of organizations.
General Partnership: In a general partnership, each of
the two or more partners will have unlimited liability for the
debts of the business. The income and expense is reported on
a separate return for tax purposes, but each partner then reports
his or her pro-rata share of the profit or loss from the business
as one line on his personal tax return.
Limited Partnership: With a limited partnership, each
of the general partners has unlimited liability for the debts
of the partnership, but the limited partner's exposure to the
debts of the partnership is limited to the contribution each
has made to the partnership. With certain minor exceptions,
the reporting for tax purposes is the same as for a general
Corporation: A corporation provides limited liability
for the investors. Except as indicated below, none of the shareholders
in a corporation is obligated for the debts of the corporation;
creditors can look only to the corporation's assets for payment.
The corporation files its own tax return and pays taxes on its
income. If the corporation distributes some of its earnings
in the form of dividends, it does not deduct the dividend in
computing its taxes, but the shareholder recipients must pay
taxes on those dividends even though the corporation has paid
taxes on its earnings. A corporation has some tax benefits such
as deductibility of health insurance premiums.
"S" Corporation: A corporation that has made an election
to be an "S" Corporation for federal income tax purposes is
treated as a partnership for tax purposes, although it is treated
as a regular corporation for other purposes.
Limited Liability: A limited liability company provides
limited liability for all of its members, but typically can
be treated as a partnership for federal income tax purposes.
State laws may differ as to whether it is treated as a partnership
or a corporation for state income tax purposes. It can be managed
by all of the members or can have centralized management in
one or more of the members. For details on all options available
for federal income tax purposes, please visit the IRS Web site
Obviously there are variations in these rules, and you should
consult with your attorney and/or accountant in each specific
case to determine what form of organization best fits your needs.
One of the things to consider in making the final decision is,
although a corporation has limited liability for its shareholders,
if the corporation does not have sufficient assets various creditors
may insist on personal guarantees from the shareholders. Examples
are your landlord, some suppliers, and by law, liability for
certain payroll taxes and liabilities to employees.
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can occur in a wide range of accidents; however leading causes
of personal injuries can be attributed to: