Partnership Business Entity

Partnerships are a common and relatively basic form of business collaboration. But to stay on track, you'll need to understand the differences between various types of partnerships and have a solid grasp of business partnership essentials.

Rather than facing the business world alone, many entrepreneurs choose to pool their resources with one or more business partners.

When partnerships work, they can result in higher returns and a less stressful small business experience. Unfortunately, partnerships can also be a fast track to disaster. When a partnership takes a turn for the worse, the business usually goes down in flames, leaving the relationship between the partners irreparably broken.

The odds of a successful increase significantly when the partners understand what they're getting into before they commit themselves to a business relationship. If partnerships look promising, your first step is to carefully consider your options and determine whether or not the essentials are in place for a successful partnership experience.

Types of Business Partnerships

  • General Partnerships. General partnerships are pass-through business entities in which all of the partners share profits and liabilities. They're extremely easy to set up, but none of the partners is protected from personal liability for the business.
  • Limited Partnerships. Limited partnerships feature a general partner and one or more limited partners whose exposure is limited to the amount of their investment. While management control rests with the general partner, limited partners enjoy the benefit of limited liability exposure.
  • Limited Liability Partnerships. In a limited liability partnership, individuals are usually not held legally responsible for the acts of their partners. In some states, limited liability partnerships also offer insulation from liabilities incurred by the business.

Partnership Essentials

  • Find the right partners. It's critical to find the right partner when forming a partnership. Although friends and family members may be willing to partner with you, they may not share your vision or commitment to the business.
  • Create a partnership agreement. Partnership agreements are a must for every small business partnership. Agreements clarify important issues like ownership shares, partner responsibilities and exit procedures.
  • Identify a controlling partner. Partnerships cannot effectively function in a 50/50 ownership split. Instead, you'll need to identify a controlling partner and reinforce the arrangement with a 51/49 (or greater) ownership division.

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