How to make a legal partnership when starting a small business

When you start up your own small business, there are three different ways that you can organize your small business: you can make it a sole proprietorship, which means that you are the only owner, you can make it an organization, or you can make it a legal partnership. When you are deciding which of these three options you want to choose, there are several different factors that you need to make sure that you take into consideration:
-- the number of employees that you will have
-- tax advantages
-- tax disadvantages
-- how long you will be in business
-- legal restrictions
-- assumed liabilities
-- type of business
-- the distribution of earnings
-- capital needs

If you decide that you want to organize your small business as a legal partnership, then you have a few choices that you can make in terms of what type of partnership you want to form legally. The two most frequent types of legal partnerships are general partnerships and limited partnerships. What is the difference between the two types of partnerships? Well, basically a general partnership can be formed by nothing more than an oral agreement between two people or more. However, it is highly recommended that you actually go so far as to have an attorney draw up a legal partnership agreement. In a general partnership, all of the owners of the small business are liable for any legal actions taken by or against the small business. All owners are also liable for any debts that the small business may incur. A general partnership is created by proof of existence, agreement, and estoppel.

Make sure that your partnership agreement contains the following elements, as drawn up by a lawyer:
-- the type of business
-- how much equity will be invested by each partner
-- the division of profit and the division of loss
-- partners compensation
-- how assets will be distributed upon dissolution
-- how long the partnership will last
-- provisions for changing the partnership and/or dissolving the partnership
-- a clause for settling disputes
-- restrictions placed upon authority and expenditures
-- settlements that will be made in the case of the death or the incapacitation of one or more partners

A limited partnership is the same as a general partnership, except that some partners have only limited involvement in the partnership and thus have limited liability. Limited partners only are liable to the extent that they are invested in the partnership, and limited partners do not have any authority when it comes to managing the company. Limited partners will have to file documents with the state registration office, and must always state that they are nothing more than limited partners. Limited partners do not have the authority to bind the small business to any type of agreement unless they have been explicitly designated as agents through estoppel or acts of ratification that have been passed by your small business in order to establish the limited partner as able to make decisions that have binding authority. Limited partners should always be designated as such.

Make sure that you hire a lawyer to help you form your partnership for your small business. A lawyer will know which state offices you will have to register with, and will be able to help you draw up a water-tight legal document that will enable all partners involved to know exactly what their involvement in the small business entails and what will happen in the case of any new developments in the business.

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Categories: Small Business,

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