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Partnership agreements can be beneficial for businesses. This is where two or more parties make a formal arrangement for the operation and management of a business. They will also share the profits of a company. Here you will learn about the different types of partnerships and you’ll also find out what steps are involved in making partnership agreements.
Types of partnership agreement
Each type of partnership agreement can benefit every company differently or affect how the partnership intends to evolve. It’s important to consider which option would be best for you.
General Partnership (GP)
All parties act as co-owners and will share legal and financial liabilities equally. This includes profits and debts. The agreement will include specific details of how profits will be shared among the members.
Limited Partnership (LP)
This type of partnership allows partners who are general partners to focus on the business’s day-to-day operations, while limited partners are only liable for how much they put into the company. It offers the partners flexibility, but can still allow for the special rights of ownership, as well as duties and protections.
Examples of LP include a family business, which can choose a general partner and watch the investments grow. Another example would be real estate investors.
Limited Liability Partnership (LLP)
Limited Liability Partnerships are a combination of general and limited liability partnerships. They protect the assets included in the partnership by each member. For example, if there is an issue with one partner, such as a lawsuit in any form, the other partner will not be affected and their assets will be safe.
LLPs still allow each member to put their knowledge and efforts towards operating the company. Members can also act as managers that oversee the business.
Businesses such as accountants, lawyers, undertakers, financial advisors or medical professionals often form this type of company.
Steps to Making a Partnership Agreement
Each partnership agreement will be different depending on each business and its overall goals and objectives. There is no one-size-fits-all partnership agreement, but they all need to include certain aspects. The steps to establishing a formal document to ensure everything is properly outlined are set out below.
Entering a partnership will also include patience and compromise. Make sure you choose your partners on these grounds. This will ensure that you can work together. This is also to be considered if you are asked to join a partnership.
The second step is to evaluate the type of partnership. Above, we reviewed the three main types of partnership: general partnerships, limited partnerships, and limited liability partnerships. Each of these options will depend on the type of business.
Next, find a unique company name that will make sure you stand out from other businesses. Register the name and register the partnership.
You’ll also want to look into the tax obligations and apply for the EIN (Employer ID Number) or Federal Tax Identification Number that is used to identify your business. The EIN is used for federal levels, whereas the Taxpayer ID (TIN) is used at the state or federal level. The social security number can also be used as the Tax ID.
A tax ID number is not required if you are a sole proprietorship or an LLC that does not have employees.
Establishing the partnership agreement is an important step. The basic terms include:
- Who owns what portion and percentage
- Division of profit or losses
- Assignment of who will handle roles or duties
- What happens in the event of withdrawal or death of partners
Next, obtain any licenses or permits that might be required. These will vary based on your business. Make sure to look into this and check you are meeting all the requirements. You’ll check with state and local authorities to determine this. There are several types of permits or licensing a company may need, such as a business license, sales tax permits, or an industry-specific license.
Finally, open up a business bank account. This type of account is solely for business income and payments. It will include the names of all parties and requires a DBA form, the EIN, and the partnership agreement.
Entering a partnership agreement can be an exciting step for the future of a business. The guidelines above are just a short introduction to what to expect and how to make an agreement.
Thanks to Finnovating you can find partners in a very simple and effective way as it allows you to connect with other startups. In addition, you can find partnership projects on the challenges platform.
There is a lot to think about, but make sure you do the necessary research to get it right. This can save you trouble down the line. You’ll find that there are many options to help you to put the agreement together successfully.