Setting up a Partnership
Seems simple, right? You and a buddy, or you and your spouse, want to set up a business. So you form a partnership and – voila! – you open shop. Actually, things are more complicated than that when it comes to establishing what’s known as a regular or “general” partnership. It turns out, for nearly all startups, that it’s not a good idea to settle for that structure. Here’s how to tell whether the cautions about partnerships apply to you:
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Realize you’re legally vulnerable Understand the default rules Draw up your own partnership agreement
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Realize you’re legally vulnerable
Just as with sole proprietorships operated by individuals, general partnerships don’t protect you and your partner, or partners, against legal claims that might be brought against your business. You and your partner’s individual assets are just as vulnerable, legally, as your business assets are. “If you form a limited liability corporation [LLC] or some other legal entity for your partnership, on the other hand, you’re going to be protected from the start against liability problems,” says Jeffrey Ferrara, partner with Boyer & Miller, a business-law firm in Houston.
Understand the default rules
Partnerships can get sticky, of course, if you and your partner decide to split up, or get into a dispute about how to divide profits, or responsibility for losses. By default, in all such cases, the rewards and responsibilities of general partnerships are divided exactly in half between the two partners, in thirds among three partners, and so on. Most states embody this equal-share principle in laws governing general partnerships, usually in something called the Uniform Partnership Act. And even if you’re down with the equal-share aspect, it’s not wise to leave the terms of your partnership up to these default laws. They may not be helpful in your particular situation. It’s much better to put your agreement into a document that specifically sets out what you and your partner have agreed on. “One of the other default provisions – which catches many partnerships by surprise – is that all the partners are equally authorized to bind the partnership,” says Rob Markworth, partner in Shanahan Law Group, a Raleigh, N.C. “That means anyone who can sign off as a partner can sign any contract, obtain financing, or anything else. That means you run the risk of one of the partners going off and doing something that would jeopardize the whole partnership.”
Draw up your own partnership agreement
There is a narrow range of circumstances in which a general partnership might make sense as your business structure, including certain professional-service industries and real-estate companies. But whatever reasoning compels you to stick with a general-partnership structure, make sure that you and your partner specify, in a written agreement, exactly how the rewards and responsibilities of running your company will be divided – even if everything is 50/50.
Our Bottom Line
General partnerships don’t come highly recommended as a legal structure for your company. If you form one, make sure you’ve protected yourself and your partners with a very specific partnership agreement.
Source: www.startupnation.com
Our Bottom Line
General partnerships don’t come highly recommended as a legal structure for your company. If you form one, make sure you’ve protected yourself and your partners with a very specific partnership agreement.
Source: www.startupnation.com
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