When you are starting a new business, you have a lot of decisions to make. One of the most important decisions concerns how you will legally organize your business. The legal format you choose can have important consequences for how your business will be taxed, whether you will be personally liable for its debts, and how you will be able to transfer ownership at some point in the future.
One of the most common types of small businesses is a partnership.
A partnership is a business formed by two or more people carrying on business as co-owners, for the purpose of making a profit. Each partner contributes to the business and has a share in the profits and losses of the business. Each partner must contribute money or “buy-in” to the partnership. These requirements are quite simple, and it is possible to form a partnership in a somewhat informal way. However, it is always best for the partners to specify their roles and obligations, and to formalize them in a partnership agreement.
Get it in writing
Among other things, the partnership agreement should include the roles and responsibilities of each partner, how the business is to be conducted, the percentage and type of ownership each partner owns, and how to amend the partnership agreement in cases of death, incapacity, or other changes in the partnership. The partnership agreement describes how new partners can enter the partnership and how disputes between the partners should be resolved.
Every partnership should have a partnership agreement to avoid personal and financial liability for each partner. Generally, writing a partnership agreement without an attorney can result in language that is incomplete and can lead to confusing and lengthy litigation. Hiring an attorney at the beginning of a partnership agreement can save costly issues in the future. It is important to receive legal advice upfront to avoid a more costly future issue due to defects in a partnership agreement.