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The Accidental Partner

RICHARD BOOTH: You don't need to have a written agreement to have a partnership. You may find yourself actually in a partnership without knowing that you are in a partnership.

EDWARD HILLER: You form it by starting a business. There is no formal formation.

RICHARD BOOTH: The partnership requires no filing with the state whatsoever.

EDWARD HILLER: It just becomes a business when you start it and don't do anything else.

RICHARD BOOTH: A partnership is what we call the default form of organization in that you can form one inadvertently simply by being in a business with other people.

FRED PROVORNY: A partnership in its legal sense is an entity that has one or more individuals who have joined together to create the entity for the purpose of making profit.

RICHARD BOOTH: Co-owners who are running a business together for profit can be deemed to be partners with each other, and therefore, liable for the obligations created by each other in the context of doing business.

EDWARD HILLER: All your personal assets are on the line.

RICHARD BOOTH: Now that can be a problem in many cases because one partner may not know what the other partner is doing

EDWARD HILLER: All your personal assets are on the line.

RICHARD BOOTH: One partner may be less careful than the other partner.

EDWARD HILLER: All your personal assets are on the line.

RICHARD BOOTH: A little bit reckless about either money or materials.

EDWARD HILLER: All your personal assets are on the line.

RICHARD BOOTH: They are liable for the accidents that the other partners might get involved with.

EDWARD HILLER: All your personal assets are on the line.

ELIOT WAGONHEIM: The only solution I can think of is to have a legal document that spells out the best case and the worst case scenarios.

Business Law Professor Richard BoothMore on Edward HillerMore on Fred ProvornyMore on Eliot Wagonheim

In a partnership, two or more people share ownership of a single business. Like sole proprietorships, the law does not distinguish between the business and its owners. In fact, the partners aren't legally required to file anything, draft anything or sign anything to set up a valid partnership. In its simplest form, you just start doing business with another person and split the profits.

But, in business, there are profits ... and losses. So even though the law doesn't say you have to do one, you'd be wise to have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed.

Yes, it's hard to think about a breakup when the business is just getting started, but many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They also must decide up-front how much time and capital each will contribute, etc.

Partnership Advantages

  • Partnerships are relatively easy to establish; but time should be invested in developing the partnership agreement
  • With more than one owner, the ability to raise funds may be increased
  • The profits from the business flow directly through to the partners' personal tax returns
  • Prospective employees may be attracted to the business if given the incentive to become a partner
  • The business usually will benefit from partners who have complementary skills

Partnership Disadvantages

  • Partners are jointly and individually liable for the actions of the other partners
  • Profits must be shared with others
  • Since decisions are shared, disagreements can occur
  • Some employee benefits are not deductible from business income on tax returns
  • The partnership may have a limited life; it may end upon the withdrawal or death of a partner

Types of Partnerships:

  1. General Partnership
  2. Partners divide responsibility for management and liability as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently

  3. Limited Partnership and Partnership with limited liability
  4. Limited means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership

  5. Joint Venture
  6. Acts like a general partnership, but is clearly for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they'll be recognized as an ongoing partnership and will have to file as like well as distribute accumulated partnership assets upon dissolution of the entity

Law Can Be Stranger than Fiction

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