Partnerships

Team Partnerships

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Types of Partnerships Legal Partnerships Taxes

Partnerships can serve as a powerful tool when building a business.

Ownership Partnership Agreements ‣ Overview ‣ Creating an agreement Resources

Getting them right takes good alignment in goals and values, honesty, hard work and clear communication.

It also really helps to write things down in an official agreement.

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Team Partnerships

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Types of Partnerships

Types of Partnerships

General partners are involved in the day-to-to work of the business and usually share in the liabilities.

Legal Partnerships Taxes Ownership Partnership Agreements

Limited partners have an ownership stake, usually as a result of an investment, but they don’t work in the business or share liability.

What do partnerships bring to the table?

‣ Overview ‣ Creating an agreement

Knowledge, skills or expertise

Resources

Valuable connections or relationships

Assets including patents

Money or access to investors

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Legal Partnerships

Types of Partnerships

Legal partnerships are partnerships that have been registered as companies. It’s important to note that they are not separate legal entities like corporations, so owners hold liability.*

Legal Partnerships Taxes Ownership Partnership Agreements

General partnerships include two or more partners who contribute to day-to-day operations of the business and share in the financial and legal liabilities as co-owners. Some partners can be “limited partners.”

‣ Overview ‣ Creating an agreement Resources

Limited partnerships have one general partner who handles the day-to-day operations and at least one limited partner who isn’t involved in running the business and doesn’t shoulder liability.

Limited liability partnerships are similar to limited partnerships, but can have multiple general partners. This is a common arrangement for professional firms (e.g. law, accounting, architecture).

Unlike with an LLC, where the corporate entity protects individuals from being personally liable for any debts or liabilities, LLPs must have one managing partner who shoulders liability for the partnership.

*for more on this see Business Structure Basics.

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Taxes

Types of Partnerships

Business partnerships are taxed much like LLCs. The partners or owners report business income or losses on their personal tax returns. The business itself doesn’t pay taxes on profits but “passes them through” to the owners.

Legal Partnerships Taxes Ownership Partnership Agreements

Partnership Tax Structure

‣ Overview ‣ Creating an agreement

% tax

Resources

Corporate Tax Structure

% tax

% tax

Partners aren’t considered employees, but rather pay income tax based on the share of profits and losses distributed to them during the year. Partners must also pay self-employment tax for Social Security and Medicare based on their share of profits.

To enable and substantiate this, a Schedule K-1 is distributed to each partner.

The partnership must also file an informational form, Form 1065, with the IRS.

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Ownership

Types of Partnerships

Most businesses are owned by a single individual, but partnerships are also common across business types.

Legal Partnerships Taxes Ownership Partnership Agreements

Business Ownership Breakdown 73.64%

Businesses have 1 owner

22.29%

Businesses have 2-4 owners

1.18%

Businesses have 5-10 owners

0.50%

Businesses have 11 or more owners

‣ Overview ‣ Creating an agreement Resources

Spouse Ownership Breakdown 72.97%

Businesses jointly owned by a spouse

27.02%

Businesses not jointly owned by spouses

<10% of businesses are started by teams of non-relatives.

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Partnership Agreements

Types of Partnerships

There are different types of partnership agreements, but they all require a contract. A contract states the terms of the partnership, including the structure of the business relationship and its intended benefits and obligations. It includes:

Legal Partnerships Taxes Ownership Partnership Agreements ‣ Overview ‣ Creating an agreement Resources

▸▸ Percentages of ownership and distribution of profits and losses ▸▸ Partners’ roles and responsibilities (such as management structure, decision-making power and day-to-day duties)

▸▸ “What if” situations—particularly organizational changes like someone leaving the partnership–—that can cause confusion and disagreement

What happens if you don’t have a partnership agreement?

If you don’t have an agreement in place, your partnership will likely be governed by your state’s default legal code for partnerships, based in common law.

In most states, this is the Revised Uniform Partnership Act (1997), which tends towards requiring that all partners share equally in the management, profits, losses, investment and contribution of services to the business. Given that this is rarely how most businesses actually work, it’s important that you create a partnership agreement now to avoid problems down the road.

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Types of Partnerships Legal Partnerships Taxes Ownership Partnership Agreements ‣ Overview ‣ Creating an agreement Resources

Creating an agreement Whether you’re just starting out or you’ve been in business together for years, it’s never too late to create a partnership agreement (which we recommend for all partnerships). You have three options:

▸▸ Do-it-yourself based on a partnership agreement you find

online. But for any partnership in which you are going to invest time and money, it’s worth having an attorney take a look as well.

▸▸ Hire an attorney to either review your template or draft up a new agreement based on your specific business needs.

▸▸ Use an online legal service that provides templates along with some basic guidance for a fee.

See our Legal Services Buyer’s Guide On the next page, we’ll go over what information to include in your partnership agreement.

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Types of Partnerships Legal Partnerships

What information is included?

The Basics Term of the partnership When it ends, if it’s not open-ended

Ownership

Partnership business name This may seem obvious, but can have many critical components (including fictitious business names/DBAs and branding considerations).

Partnership Agreements

Business address

‣ Overview

Partners’ names

Deadlines Critical for partner contributions

Taxes

‣ Creating an agreement

Effective date When the agreement starts

Fiscal year Generally the same as the calendar year

Accounting, auditing and record-keeping practices Particularly for tax time

Resources

The Details Purpose of the partnership Contribution of capital, expertise, etc.

Partnership contributions and ownership percentages This could involve equal or unequal shares, depending on initial outlays of cash/capital or “sweat equity.”

Allocation of profits and losses This generally depends on ownership percentages. This includes “draws,” in which profits are allocated to one partner before a general distribution to all partners.

Partner authority The type of consent a partner needs before contractually binding the partnership. Options includes majority vote or unanimity.

Decision-making power How major decisions are reached and what constitutes such a decision Management It’s advisable to specify roles and responsibilities, such as if one partner is responsible for accounting, another for sales.

New partners Even if this isn’t going to happen soon, it’s a good idea to specify terms and conditions for bringing new partners aboard. This generally involves a partnership contribution.

Withdrawal or death of a partner This involves specifying how partnership interests will be valued and bought by one of the remaining partners or the partnership as a whole. (You may also want to consider key person insurance, which is simply insurance on a key person in a business).

Dissolution of the partnership Don’t enter a business arrangement without having specified an exit strategy. It may take place through unanimity, majority vote or singlepartner vote.

Conflict resolution Specify if you’ll seek out mediation prior to any legal action.

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Resources

Types of Partnerships

Find a partnership agreement template online and complete it yourself (although we still recommend having an attorney review this for you if possible):

Legal Partnerships Taxes Ownership

▸▸ Rocket Lawyer Partnership Agreement ▸▸ Docracy General Partnership Agreement

Partnership Agreements ‣ Overview ‣ Creating an agreement Resources

Also check out: Legal Services Buyer’s Guide Business Structure Basics

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