If you’re forming a partnership, here are some things to consider
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Wondering how to form business partnerships with two or more people to start or grow your company?
Learn about the different types of partners and partnerships, their differences, advantages, and disadvantages to make your best decision for new business startup.
What is a partnership in business?
A business partnership is similar to a personal partnership or marriage where individuals decide to:
Business partnerships are a specific type of, legally binding, the business entity that is formed by the partnership agreement, accepted by two or more individuals, who are the business co-owners. Read my review of partnership agreements, what to include and pricing
A multiple-owner partnership business structure is where each owner invests either time, talent, and money into the company. In some partnerships, individual co-owners work in the daily operations business. While other partnerships include partners with limited participation and also limited liability for the company’s debts and lawsuits.
Partnerships differ from other business structures, such as corporations, because they are not separate entities outside of the original owners in the eyes of the law. The partnership share of income tax is paid by the partners. The profit and losses of the company are divided, according to the percentage of ownership, amongst the partners and listed on their individual personal tax returns.
This means that this type of business entity, like a DBA or sole proprietorship, and some forms of subchapter S corporations, is a pass-through business. This means that all the profits and losses of the company will pass through to the owners’ personal financial income tax statements.
Note that there are both differences between both types of partners within partnerships and the legal business entities of partnerships. Read on to learn about their important differences before you form your partnership.
Different types of business partnerships may have different levels of partnership participation and hierarchies. This means that partnerships can have several different types of partners within one partnership. These are the different types of partners roles you can create:
The first step in creating your partnership is to decide the type of partnership that you want for your new business:
One of the key considerations for business partners is how to split profits and revenue among the partners. To evaluate this fairly you need to understand the partnership profit calculation and equitable partner splits.
Dependent upon the type of partner will determine the profit split.
Read my in-depth post which includes partnership profit calculations on how to split profits in a small business partnership
Most business partnerships are registered with the state in which their business is headquartered. However, state requirements vary for registration law. Partnership agreements, which clarify the relationships between the co-owners, partners, and investors is generally required as part of the formation process. These partnership agreements are a written, legally binding contractual agreement. However, they are not a requirement in all business circumstances.
The business law states that our courts will determine if a partnership, formally registered or not, was the rightful business owner by determining if there was sharing of profits and losses, capital investments by partners, joint control, and management of the business and common ownership of business assets.
Depending on your state. You may have multiple choices of the types of partnerships available for your business entity structure.
How to prepare a partnership agreement
How to join a partnership
Most partnerships allow individuals to join at the beginning or after the partnership has been formed and is in operation. The new partner must invest in the partnership, either financially or with talent and time as their admission fee. The amount of money and other details, including the liabilities share will be determined by the other partners and the written partnership agreement that was created at the onset of partnership formation.
Your partnership agreement is amongst your most valuable assets as a partner. It will describe all the responsibilities of each partner and detail that partners share distribution for both profits, losses, and liabilities. Additionally, it will detail the roles and expected contribution of both time, talent, and money for each individual.
Good partnership agreements also outline actions for typical situations such as member, divorces, death, business closures and acceptance of new partners.
How a partnership pays income tax
The partnership itself as a business entity does not pay income tax unlike some forms of corporations do. Instead, the individual partners will pay taxes based on their share of either profit or loss of the business operations in the stated tax year.
Partnerships file an information return with the IRS form number 1065. Limited liability companies LLCs that have multiple members will file their income tax as a partnership. Each state has differing tax filing requirements, check with your Secretary of State for your state’s laws.
Starting a new company yourself is a great exercise in entrepreneurship, however, by getting a business partner, you get an extra set of skill sets, background, and new ideas. You know that two heads are better than one, especially when brainstorming new business ideas and solutions to commerce problems.
Your business partner can help you sort the good ideas from the bad ones and give their expert opinion and feedback. Also, a business partner can give you another view on issues that will ultimately lead to better resolutions.
The different mix of expertise that you and your partner bring could grow your business further and help your firm to increase sales. Remember, a business partner comes with another set of connections that can improve your companies long-term projections and generate higher profits in the future
Starting a business by yourself can be difficult if you are grappling with finances. Odds are you’ll both you and your partner will contribute capital to the venture. If you do need a business, your loan probably will be approved more quickly and for a larger loan amount together as partners than as an individual entrepreneur.
Investors, especially VC venture capitalists, prefer to fund businesses with co-founders. This is because their experience has revealed that beginner entrepreneurs are less risky if they have a more experienced business partner who completes their skill set. Investors know that launching a business is challenging, and having a partner is a good way to keep your motivation high and build a successful firm.
If you want to find a business partner there are many places to look both locally and internationally. Start in your inner circle of family, friends, and neighbors. Then expand your search to:
Get more tips and more of the best places to find new business partners in my post
Starting a business with your spouse, or lover can be both a challenge and an opportunity. Launching a startup with your husband or wife can be tough to maintain both finance and finance but it can also bring great results.
Pros of Spouse as Business Partner
Cons of Spouse as Business Partner
Read more here at my post business ideas for couples – married and friends!
Business partnerships usually start off well. You have two (or more) people who share a common vision and common goals and agree on how to split the profits too! The partners work together to get the business off the ground while taking pride in the things you accomplish together.
No matter how well a business partnership starts, this honeymoon period is bound to end eventually. Some partnerships are unable to withstand the inevitable rough patches and disagreements that will become a part of any long relationship. If the partners can’t work their issues out, it might be time to start thinking about dissolving a business partnership.
With so much at stake, including the initial funding for your small business, you do not want to take leaving the partnership lightly. That said, you do not want to stick around in a bad partnership for too long.
The following five signs could mean that it is time to end your business partnership:
Read my post about the signs to know when it is time to dissolve your business partnership