Business Partnership

Whether one is already a business partner or debating forming a new business partnership, every entrepreneur should know what defines a successful business partnership. While developing business partnerships can be complex, understanding how they work and what partnerships offer entrepreneurs can make all the difference between a successful company and a business that does not achieve its potential.

Many business people may wonder why they would consider starting a business partnership instead of a sole proprietorship. While the list of reasons is fairly long, here are a few advantages that partnerships offer:

• Complementary Resources: Business associates can combine their resources to obtain more funding or capital when forming a partnership. Partners can secure better credit or double their founding money when a new business has more capital. For example, when three business partners form a partnership, one may own property that they can add to the mix to increase the new venture’s value.

• Complementary Talents: Often, business partners have unique skills that work well together. For example, one partner may be a mathematics whiz, while the other is a people person. Having a group of people to rely on brings more resources into the mix and more talents. In addition, many of us are experts in something; using those talents can help partnerships excel.

• Low Costs, High Advantages: With more people involved, individual costs go down. However, new companies must pay numerous fees and bills, including licensing fees and initial investments. Sharing these costs helps partnerships succeed.

Business partnerships can be very advantageous for entrepreneurs. Please contact our attorneys to help you write a partnership agreement in  California.

What are the types of business partnership?

Partnerships are the simplest structure for two or more people to own a business together. There are four types of business partnerships: LLC partnership; Limited liability partnership (LLP); Limited partnership (LP); and General partnership (GP). The simplest form of a business partnership is a General Partnership which consists of two or more persons and is not incorporated.

• LLC Partnership: A limited liability company (LLC) combination of a corporate structure and a partnership. Business partners can form an LLC to hold assets or run a business.  LLCs protects its members against personal liabilities. The owners of an LLC are members. 
  
  
• Limited Partnership: A limited partnership is when one general partner runs the business and is responsible for it, and the other partners are advisors. Limited partnerships can also feature more than one operator of the business, and sometimes the “silent partners” are investors instead of advisors or a mix of both. Most notably, the silent partners are not liable for the business, so the other partner or partners take on all the financial risk in this setup.
  
  
• Limited Liability Partnership: When all business partner enjoys limited liability, they create a limited liability partnership (LLP). Often, law firms choose this structure, as the partners collectively decide that the risks are too great. Since all partners, in this case, enjoy liability protection from other partners or the business’ actions, it is also a safe choice for medical clinics.
  
  
• General Partnership: General partnerships are one of the most popular choices for dedicated entrepreneurs who believe in their new business idea and are all game to take a risk. Together, these partners create a general partnership.  The agreement sets the new venture in motion by securing the shared operation of the company. When all the partners participate in running the company, they are also liable for the business’s success and failures. The owners also share business operations, duties, and responsibilities. Often, business partners divide up the duties of running a business according to their talents and experience levels.

The types of business partnerships determine their type of taxation under California FTB and IRS.

Starting a business partnership

There are many different ways to form business partnerships. The most common business is a general partnership which requires only a verbal agreement; the prospective partners begin by securing a verbal agreement. The agreement explains that the parties wish to create a new company. Sometimes, the agreement explains that the partners wish to share an existing company.

The verbal agreement may start the process, but the partnership is not yet completed. Next, the partners must confirm that the new deal is valid in writing. The founding document, also known as the Partnership Agreement, features important information, including:

• The specific type of business partnership
• The structure of the partnership
• Additional details, such as percentages of shares the owners possess

When all parties sign this document—usually in the presence of an attorney—the partnership is legally ready for business.

How Do Partners Choose a Business Structure?

One cannot afford to gloss over this step since, in many ways, the way your business is managed and run depends on the legal structure of your partnership. The choice from a general partnership to an LLC is up to the prospective partners.

Why is this step necessary? Your business structure will dictate personal liability, tax structure at the state and federal level, and even individual and collective responsibilities. Since business partners might have contrasting ideas regarding the best structure, make this decision a priority.

Why choose a Limited Liability Partnership?

A partnership with limited liability includes the word “limited” for a reason. This structure works to limit the partners’ financial responsibilities for the business. The business equivalent of an LLC, or limited liability company, this structure comes with many legal and tax implications that make LLCs so popular.

Why might entrepreneurs choose this structure? First, if they plan on a company with equal participation by both partners, this approach might make the most sense.

Why Choose a General Partnership?

When both partners are active in business operations and take on responsibility for any business debts., they create general partnerships.

Generally, business owners find this structure amenable because general partnerships are easy to start; familiar here is that a general partnership does not protect partners from liability.

We always recommend speaking with a business lawyer before leaping into a general partnership. This id is especially helpful because an attorney can help evaluate any risks inherent in the agreement rationally.

Why Choose a Limited Partnership?

When business partners know that their roles will be uneven within the business, limited partnerships are typically the top choice. For example, suppose one partner has decided to be an investor only, and the other partner will be responsible for day-to-day operations. In that case, a limited partnership is an answer.

However, while businesses appreciate the perks of this structure, be aware that not all partnerships are eligible for it. A business lawyer can help partners figure out if and how this structure can work for their business.

The goal is to be honest about which structure makes the most sense as the business gets off the ground if a business partnership involves honesty, transparency, and clear goals, choosing the right structure should be a snap.

What Is the Difference Between a Business Partner and a Shareholder?

A shareholder is a person, company, or institution that owns at least one share of a company’s stock or in a mutual fund. A business partner is someone who helps own and operate a company established as a partnership in a particular state. 

A shareholder is typically someone who invests in the business. When a person owns shares in a publicly traded company, they can participate in company decisions and exert their influence. However, shareholders’ influence is not unchecked. Their level of power depends on how many shares they own.

While shareholders may not have as much influence as the partners who started the business and took that leap of faith, company shareholders also do not hold liability. So, for example, if the authorities launch an investigation into the business over claims of insider trading, shareholders are not accountable for the company’s or its partners’ unlawful actions.

On the other hand, business partners hold ownership over the business based on their agreement with their peers, the other partners. As a result, partners share control over how the company runs and assume liability if problems occur, depending on the business structure.

Why Contact a Business Attorney?

At Nakase Wade, our California business lawyers and corporate attorneys have helped numerous businesses get their start. Our skilled attorneys are well-versed in California’s business laws and regulations, and we can answer your questions about new company partnerships, including the risks and rewards of starting a new business. Contact us for a free consultation today.