Think of a partnership like a business marriage because when 2 or more people form a partnership, they are essentially married from a business standpoint. In other words, when two or more people engage in business activity, and they have not filed papers with the state to become a corporation or an LLC by default the business is considered a partnership.
In general, when we refer to partnerships, we refer to general partnerships, in which the general partners are personally liable for all business debts including court judgments. Each individual partner can be sued for the full amount of the business debt and each partner can hold the other partner liable. Everything the business and the partners own individually is on the line in the case of partner conflict and business liability.
In essence, a partnership is a lot like a sole proprietorship, but is owned by several people and all liability is shared between the partners.
If you have ever been in a bad relationship, you know the damage it can do to your psychological and financial well-being when the 2 partners disagree, fight, or… they want to end the relationship. On the other hand, if you have been or are in a healthy, supportive, successful and beneficial relationship, you know that the benefits of the right partnership can be endless.
To recap what I said so far:
- A partnership doesn’t require lots of paperwork to start
- From a taxation point of view, the partnership’s taxes are 100% tied to the partners’ tax returns and the entity on its own does not pay taxes.
- In a partnership, all partners are liable personally, for their obligations to the partnership. This is known as a general partnership, in which any individual partner can bind the whole business to contract or business deal, or you can say that each partner has what’s known as “agency authority” for the partnership.
Next, there is something called a limited partnership, which is a combination between a general (or primary) partner and one or more limited partners. The general partner has the same role as in a general partnership. She or he controls the company’s day-to-day operations and it’s personally liable for the company’s business debts. The limited partner(s) contributes financially to the partnership but has minimal control over business decisions or operations and normally cannot bind the partnership to business deals. In other words, a limited partner cannot close the deals in the name of the business. In return for giving up the management power, the limited partner gets the benefit of protection from personal liability. This means that a limited partner cannot be forced to pay off business debts or legal claims, with their personal assets. But in case of the company being sued, he or she can lose their investment in the business. It’s important to note that the limited partner needs to stay out of management activities in order to maintain their limited personal liability. If the limited partner participates in the control of the business, they may become liable.
Another kind of partnership it’s called a Limited Liability Partnership or an LLP. In some states these particular partnerships are only available to professionals such as lawyers and accountants, as they are particularly well suited to them. Most professionals do not prefer general partnerships because they don’t want to be personally liable for another partner’s problems, especially in those cases involving malpractice claims. I am including this here, because the coaching industry is still fairly new and are not regulated, however, malpractice claims may occur. It is important for you to be aware of all business structure options. that may benefit you. Also, we will discuss in detail liability insurance that you will most likely purchase to cover yourself and your business.
So, if forming a corporation to protect personal assets may be too much trouble, and when some states won’t allow professionals such as lawyers, consultants or even coaches to form an LLC, the solution often is a limited liability partnership. This business structure protects each partner from debts against the partnership arising from professional malpractice lawsuits filed against another partner.
With this being said, I want to highlight how important is it to consider seriously who you want to get into partnership with. You want to look at all of the risk factors involved in starting your new business. It’s also very important that a lawyer drafts the partnership agreement, even though is not legally required to do so.
Partnerships are NOT the most successful type of business legal structures, and when there are disagreements between the partners, it often results in the partners going to mediation, or they simply fight with each other for the smallest details of the business.
Regardless, if you decide that a partnership is right for you, here are a few good points to include in the partnership agreement:
- The full, correct name of the partners
- Date of partnership creation
- The time and money each partner will contribute. Please keep in mind that very rarely does it happen, that both partners can contribute equally in time and money, and this should be specified and agreed upon from the beginning, otherwise it often happens that one partner ends up working long hours on the business and feels that he/she is being taken advantage of, becoming resentful of his/her partner.
- The duration of the partnership should also be specified: for how long the partners going to share this business together?
It’s important to clearly know the methods for making business decisions, because let’s be clear, somebody has to have the final word in the event that the partners disagree, which believe me happens pretty often in this type of business structure.
- The agreement must be the clear on the sharing of profits and losses. Normally, that is directly proportional to the percentage of ownership. Sharing of profits and losses should be agreed upon from the beginning, in detail and in writing, and will be included in the partnership agreement.
- Distribution of profits, is another important factor to include in your partnership agreement. For example, a partner may want to take money out of the business every month or every quarter, while the other may like to leave the money in the business while the business grows. Differences like this can be a huge reason for a fight between partners later on. That’s why it’s very important to be clear about each partners needs and desires about the business, and to put it in writing from the beginning.
- One more important thing to include in the agreement is the restructuring or dissolution of the partnership in case one of the partners becomes disabled or for any reason, cannot conduct the business operations anymore. So, better get it in writing, from the beginning, what is going to happen with the business when unwanted events like death or disability, may arise . In the event of death or disability of a partner, there must be a specified way to evaluate the partnership for estate sales or cash out purposes, or maybe for redefining and keeping the business going.
If you seek a professional to draft your partnership agreement, they may include all different specifics, or you can find a standard form online. Either way, a handshake won’t do it in a partnership.
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Joeel & Nataile are co-founders of Transformation Academy®, where they train leading-edge entrepreneurs, leaders and life coaches how to master their mindset and create a purpose-driven business. They have started more than a dozen businesses, and trained over 500,000 coaches from 200_ countries and territories. Joeel is a former psychology professor with a Master’s Degree in Counseling and Education is currently completing his dissertation on eudaemonic happiness for a Ph.D. in Psychology.