Partnerships remain one of the most straightforward and easiest business structures available to partners who want to work together to make their business a success. Partnerships require minimal paperwork and bureaucracy, and they rarely require public filings. Still, formation is an important step for partnerships, just like it would be for any business. This cannot be done without a well-drafted partnership agreement. If you are looking to start your own partnership, a partnership lawyer can help you draft the best possible partnership agreement for your needs. An attorney can help you decide whether a limited liability partnership, a limited partnership or general partnership is right for your needs and help you draft the necessary documentation quickly. When you start a business as a partnership, a partnership agreement governs its operations. A partnership agreement, or partnership contract as it is sometimes called, is simply a legal document that that establishes the terms of the partnership, as well as the roles and responsibilities of the partners. Partnership agreements serve as the governing documents of any registered partnership, and they establish the rights and responsibilities of each partner, as well as the rules on how the business should be run on a daily basis or in the event of a business crisis, such as the death of a partner or dissolution of the partnership.
While most partnership agreements will be fairly similar and should require the same types of clauses and provisions, there will be some variation depending on the type of partnership. There are three basic types of partnerships available to small businesses in Utah:
• General Partnership (GP): General partnerships make up the majority of partnerships in the Utah, as they are the simplest type of partnership available. In general partnerships, each partner is involved in the day-to-day management of the business and share in the unlimited liability agreed to under this structure.
• Limited Partnership (LP): Like a general partnership, general partners in limited partnerships run the business and take on unlimited liability. Unlike general partnerships, however, limited partnerships can have “silent” limited partners who are not involved in the operations of the business and have liability limited to the amount of their investment.
Limited Liability Partnership (LLP): Limited liability partnerships are only available in some states, and most states restrict these types of partnerships to certain types of undertakings. LLPs operate like GPs, but all partners have limited liability.
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.
What should be in a partnership agreement?
Your partnership agreement needs to cover a lot of ground. The document should include the following:
• Name of your partnership: While it may seem like common sense, one of the first things you and your partner(s) must agree on is the name of your business.
• Contributions to the partnership and percentage of ownership: Create a list of specific contributions you and your partner(s) will make to the business. In addition to contributions, you must decide on the percentage of ownership, which is typically dictated by each partner’s contributions to the business.
• Division of profits, losses and draws: You and your partner must decide how to divide the business’s profits, losses and draws. Partners can agree to share the profits and losses in accordance with their percentage of ownership, or they can be distributed equally amongst the partners regardless of ownership stake.
• Partners’ authority: Partnership authority, also known as binding power, should be defined within the partnership agreement. The ability to bind the business to a debt or a contractual agreement can expose the business to unnecessary risk, which is why the partnership agreement should explicitly state which partner(s) have binding authority.
• Withdrawal or death of a partner: While no one wants to consider the possibility of a partner’s withdrawal or untimely death on the brink of launching a new business, this is something that needs to be clearly stated in the partnership agreement. The agreement should also outline the valuation process for the business and/or any requirements for maintaining a life insurance policy designating the other partner(s) as the beneficiaries.
Uniform Partnership Act
Not all partnerships operate under partnership agreements. Some simply operate under an oral agreement. These partnerships are governed by state law and the Uniform Partnership Act. The Uniform Partnership Act defines defaults applied by the states to operations and disputes involving partnerships. While strictly speaking there is nothing wrong with operating according to the Uniform Partnership Act alone, conducting business without the protection of a partnership agreement often leads to unexpected, even costly, outcomes for businesses. It is always best to ensure that you have full control over how your business operates by using a partnership agreement.
Key Terms and Provisions in Partnership Agreements
Although every partnership agreement will differ slightly, all partnership agreements must address certain issues through the following key terms and provisions.
• Name: The first clause in any partnership agreement must name the business and in some cases must be accompanied by a request to file a “Doing Business As” or fictitious name.
• Ownership Percentages; All ownership allocation must be clearly defined.
• Capital Contributions: It is important to not only establish what contributions are expected of each party when starting the business, but also who will be obligated to contribute further capital at later stages and under which circumstances.
• Profit and Loss Allocations: While most profits and losses are allocated according to ownership percentage, this is not always true, especially if one partner does more in terms of management and is not given a salary. All profits and losses must be clearly attributed.
• Distributions: These provisions clearly establish when profits of the business can be distributed to the partners, and which partners, if any, earn a salary.
• Partner Authority: Unless otherwise stipulated, all partners have equal and unlimited authority to commit the business as they see fit. This power can be limited in this clause or require joint authority for large decisions.
• Management:. This section generally assigns major management duties of the partners, especially vital procedures such as accounting.
• New Partners: This clause details the procedure to add new partners.
• Death/ Disability: This clause defines what happens to the partnership after a partner dies or is incapacitated, and, in the case that the partnership continues to exist, defines the authority of the beneficiaries of the partner who left.
• Dissolution: This clause defines situations under which the business will be dissolved, as well as exit strategies for any single partner who wishes to leave.
• Dispute Resolution: Even the best partnerships sometimes experience disputes. This clause explains the procedures for resolving such conflicts.
How to Make a Partnership Agreement Legally Binding?
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.
General Business Partnerships
The simplest structure is a general business partnership – typically formed by sole traders who decide to join forces. A business partnership doesn’t have legal status. It’s a straightforward business agreement between two or more people who want to work together. The only legal requirement is that the partnership is registered with HMRC and each partner registers for self-assessment and completes a separate tax return. All the business’s profits can be divided between partners with each partner paying tax on their share. Each partner is personally liable for any losses the business makes. This means that if your partner can’t pay, you’ll be liable for their share of the business debts, which could see your home or other assets at risk.
Advantages Of A Business Partnership
• Flexibility and Support: Running a business with a partner means mutual support and the business won’t suffer if one partner is sick.
• Broader Skills Set: Partners can bring complementary skills and experience.
• Less Paperwork: As each partner remains self-employed, there’s no need to deal with the administrative requirements of limited companies.
Disadvantages Of A Business Partnership
• Joint Liability: All partners are equally liable for debts incurred by the business and personal assets can be claimed by creditors to pay off debts.
• Less Security: If a partner leaves, the partnership is dissolved.
• Financial Transparency: Some businesses are less willing to work with partnerships – with no accounts filed with Companies House, there’s less transparency.
A limited partnership is more formal than a general business partnership. It has one general partner, and one or more limited partners. Unlike the general partner, the limited partner isn’t involved in the day-to-day running of the business and has personal asset protection against debts limited to any money in the business. The general partner has unlimited liability, and their personal assets are on the line if the business cannot pay its debts. The limited partner only gets their profits after the general partner has received their share. Limited partnerships are useful for short term projects, such as a media production, where limited partners invest but the general partner retains day-to-day control.
Advantages Of A Limited Partnership
• Managerial Freedom: The general partner can get on with running the business without having to get agreement from limited partners.
• Attract Investors: Investors can back a venture without day-to-day involvement or unlimited liability risks.
Disadvantages Of A Limited Partnership
• Liability: The general partner has unlimited liability for losses and debts.
• Administration: The general partner must ensure legal documents and agreements are in place and hold annual meetings.
Limited Liability Partnerships (LLP)
A limited liability partnership (LLP) combines the flexibility of a general partnership with the limited liability of a limited company. It can be set up by two or more members either a person or a company who jointly own and control the business. There must be two designated members at all times, responsible for administration such as managing the company accounts. An LLP business structure protects its partners’ personal assets, limiting their liability to the amount they have invested in the business and any personal guarantees given when raising loans. You must set up an LLP as a profit-making business, rather than a charity or non-profit. You’ll need to incorporate the LLP with Companies House, and report on business activities with Companies House and HMRC, similar to a limited company. However, LLP partners must complete their own annual tax return as all profit is shared and is taxed as income – an LLP doesn’t pay corporation tax like a limited company.
Advantages Of A Limited Liability Partnership
• Protected Assets: Partner assets are protected to the money in the business.
• Flexibility: You can set the terms such as organization and share of profits as a legal agreement between partners.
Disadvantages Of A Limited Liability Partnership
• Disclosure: An LLP must publicly report its financials via Companies House, so partner incomes are in the public domain.
• Tax: Profit is taxed as income operating as a limited company may be more tax efficient.
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