When an individual forms and operates a small business, many times that business is set up as a very simple and straightforward sole proprietorship. However, when partners are involved in owning a small business together, a sole proprietorship is not a business structure that can be used to establish the business. Instead, for a simple and straightforward business structure, many business partners turn to a partnership.
What Is a Partnership In a Small Business?
A partnership is a business structure that can be simply set up and utilized to share ownership of a small business between business partners. Unlike an LLC (a limited liability company) or a corporation, choosing a partnership for your business structure does not require complex business filings or paperwork to be submitted to the state. Typically there are no formal requirements to establish a partnership, only a business, and shared profits.
What Is Considered a Partnership?
There are several types of partnerships that you may choose for your partnership, including a general partnership, a limited partnership, or a joint venture. If you choose a general partnership, then you and your partners will equally divide the responsibilities associated with the management of the company, and you will also equally share the profits.
While a joint venture also operates as a general partnership, if you and your partners choose a joint venture, it is only to do so for a specific and limited purpose of for a single project. If the project you engage in for your joint venture is repeated time and time again, it may actually become classified as a general partnership and become subject to the rules of dissolving a general partnership (discussed more below) should you and your partner decide to cease operations.
The third type of partnership is a limited partnership. As the name suggests, a limited partnership involves limited liability, or passive, partners that limit their involvement to the investment of funds or other resources, while the partnership on a day-to-day basis is controlled by a managing partner or managing partners. In this setup, if you are designated as the managing partner, you are responsible for the operation of the business and are responsible for the liability associated with the success or the failure of the business. For limited partners, the only risk they shoulder is their initial investment.
Advantages and Disadvantages of a Partnership
Each type of partnership has its own advantages and disadvantages. A general partnership has the advantage of being very easy to form, with essentially no filing requirements or formal procedures that must be followed. This ease of startup is why so many business partners choose to establish a general partnership. However, a general partnership also has its drawbacks. In a general partnership, all partners share equally in the success and failure of the business and will share equally in the losses or profits as well. While this may be a very good aspect of a partnership when things are going well for the business and relationships are good between the partners, if issues arise that are a result of one partner’s bad behavior or poor planning, all partners must suffer together.
A problem that goes hand-in-hand with the general partnership’s shared risk and the reward is the fact that all debt and liability is not borne only by the partnership, but is also borne by the individual partners as well. Essentially, all partners share the debt of the business. For these reasons, it is extremely important to put a strong small business partnership agreement in place. This is essentially a small business partnership contract that sets forth rules all partners must abide by when acting on behalf and in relation to the business.
Limited partnerships, however, can create a protection from the individual liability for the debt. Limited partners in a limited partnership are not individually responsible for the debt of the business. Only their original investment is at risk, and so the risk for the individual investing partner is much lower in a limited partnership than it is in a general partnership. General partners or managing partners in a limited partnership retain the risk of those partners in a general partnership. However, in order to obtain the protections of a limited partnership, the partnership documents may be complex and require additional time and expense to put together. This process can be far more expensive and time-consuming than the time it takes to establish a general partnership. If the correct documents are not completed and filed as required, the limited partners could lose the protection of the limited partnership and be held responsible for the liabilities of the business as though a general partnership was in place.
A joint venture partnership has the benefit of establishing a business relationship so that partners may undertake to accomplish a specific objective or complete an individual project while sharing the costs and profits of that project. However, a joint venture partnership is limited to only a single venture. Should the scope of the activities undertaken by the joint venture expand outside the venture in question, the partners may unwittingly create a general partnership and be governed by the rules that govern joint partnership.
Ending the Partnership?
Just as any business may cease to operate for any number of reasons, oftentimes partners find themselves in the situation of wanting to end their business relationship with their partners. If you want to terminate your partnership, known as dissociating the partnership, in the most straightforward partnership you can do that by simply giving the notice of your express will to leave the partnership. However, many times, dissolving the partnership is now so easy or straightforward.
Many partnerships are governed by written partnership agreements that set forth specific requirements of how a partner can dissociate from the partnership. Even after leaving a partnership according to the written agreement, you will likely still be liable for the obligations of the partnership that are outstanding at the time you dissociate or that were incurred during your time with the partnership. You should think of dissociating as a process rather than a single event, as it typically takes some time to wrap up the business (formally known as the “winding down” process). During that process, the partnership must ensure that outstanding debt is paid and other obligations are fulfilled as required.
If you are considering a small business partnership or a partnership small business owner, it is important that you obtain solid legal advice from an experienced small business attorney before making changes to your business structure. An experienced attorney can provide small business partnership advice to ensure that you choose a business structure that is the best fit for you, your partners, and your small business partnership.