Question

People seek to form partnership to extend and maintain business operations. Each partner contributes to all aspects of the business including, money, property, labor or skill. The profits and losses of the business are shared among the partners. The decision-making process is important as each partner may have different opinions regarding issues, structure, ventures, and operation. Therefore, it is vital to develop a legal partnership agreement (Partnership Deed) to document how future business decisions will be made.

Discussion Instructions:

• For this discussion, define a type of partnership company you would be interested in forming. (State the services, and the goals of the business).
• Draft a partnership agreement and discuss each element and the importance of include those elements in the agreement. (ALL elements significant to operating the partnership should be included in the agreement).
• How can a partner's contribution of liability beneficial to the business operations.

Answer 1

LLC partnership (Multi-member LLC)

A limited liability company (LLC) can have one owner or multiple owners, who are called members. LLCs with multiple members are called multi-member LLCs or LLC partnerships.

Under an LLC, members have a legal shield between their personal assets and the business, meaning they generally can’t be sued for the company’s actions or debts. However, they can be held liable for the actions of another member, especially if they knew the member was negligent or made management decisions that led to a lawsuit.

Keep in mind that the amount of liability protection LLCs offer can differ depending on your state. Make sure you understand your state’s rules and requirements before choosing a business entity.

The benefits of forming an LLC partnership include:

• Personal liability protection: Members receive legal protection between the business’s actions and debts and their personal assets.
• Tax flexibility: LLCs can elect to change their default tax classification and be taxed as an S corp or C corp.
• Corporate members: An LLC can have a corporation as a member. Other types of partnerships can’t be owned by other businesses, only individuals.  
• Anyone can form an LLC: Some partnerships can only be formed by certain professions, like lawyers, accountants, and architects. An LLC can be formed by most types of businesses.

A major drawback to forming an LLC partnership is that members can be held responsible for the actions of other members.

Types of businesses that typically form LLC partnerships: Companies whose owners want liability protection from the business while still being involved in the day-to-day management and operations. Since LLC partnerships can be formed by most types of businesses, they’re generally a good fit for most people.

Limited liability partnership (LLP)

A limited liability partnership (LLP) is a type of partnership where the owners aren’t held personally responsible for the business’s debts and obligations or the actions of other partners.

This generally means you can’t lose your personal assets if someone takes legal action against your company, unless you’ve personally done something wrong. However, partners can be held liable for their own negligence, if they personally did something wrong, or engaged in malpractice.

Like an LLC partnership, the liability protection you receive under an LLP varies from state to state. Always check your state’s rules before forming an LLP.

The benefits of LLPs include:

• Liability protection from other members’ actions: Unlike other types of partnerships, partners in an LLP could have personal liability protection from both the business’s debt and other partners’ negligence (depending on the state).
• Easy to add or remove partners: Using an LLP partnership agreement, you can decide how much each partner is paid from the business and easily add or remove partners. (This is also a benefit of an LLC.)
• Management flexibility: Partners decide how much they want to be involved in the operational and managerial side of running the company, and involvement won’t affect their personal liability. Remember, partners of an LLP are only liable for their own behavior. So even if they’re making decisions about the company with another partner, they’ll only be held responsible for their own actions.

• Limited partnership (LP)

  When it comes to limited partnerships (LPs) there are two types of partners: general partners and limited partners.

• Limited partners don’t make business decisions but usually provide startup funding and capital. Sometimes they’re called “silent partners.”
• General partners help manage the company and make business decisions.  

• An LP must have at least one general partner and one limited partner.

• The general partner is personally accountable for the entire business, including its debts and the actions of other partners.
• The limited partner is not personally responsible for the company since they have no decisionmaking power.

• The primary benefit of an LP is that the limited partner receives legal protection regardless of their financial contributions or ownership percentage. This could make a business more attractive to investors who have the capital to put into a company but don’t want to take on the risk of actually running it.

  Other benefits of an LP are:

• Decisionmaking power: The general partner retains their decisionmaking power while benefiting from the financial contributions of the limited partner.
• Corporate partners: A corporation can be a partner of an LP, giving general partners more opportunities for investors.

• A drawback of an LP is that a limited partner can lose their limited partner status if they become too involved in the management of the company. “Too involved” can mean signing legal contracts on behalf of the business, making management decisions, and carrying out business activities.

  So if the limited partner doesn’t like the way the business is being run, they have little say in the matter. It also means that the limited partner doesn’t need to be consulted about business decisions, which may not be for everyone.

  For the general partner, the drawback of an LP is that general partners are personally responsible for the business. There is no legal protection between the general partner’s personal assets and the business.

  Types of businesses that typically form LLPs: Companies with financial backers who don’t want to be part of the daily management or operations.

General partnership (GP)

Unlike other types of partnerships, general partnerships don’t require you to register with the state, and don’t even require a formal agreement. If you and another person conduct business together, you default to being a general partnership.

General partnerships offer no personal liability protection.

That means each partner is legally responsible for the business’s debts and actions. If the company is sued or can’t pay its financial obligations, the partners’ personal assets are at risk. This also means partners are liable for each other’s actions. (Choose your business partners wisely!)

The benefits of a general partnership are:

• Easy to form and low-cost to run. Since there’s no state registration, you don’t pay for the costs of forming a business entity or the ongoing registration fees.
• Tax flexibility: Partnerships can ask to be taxed as a corporation using Form 8832: Entity Classification Election.
• Corporate partners: Like an LLC and LP, general partnerships can be owned by both individuals and corporations.

The drawbacks of a general partnership include:

• No personal liability protection: If your business is sued or has outstanding business debts, your personal assets are at risk.
• Partners are liable for each other’s actions: If your business partner is sued, you can be sued with your partner. If your partner is sued individually but can’t pay the damages, the claimant can potentially collect money from you.

Types of businesses that typically form LLPs: Companies who don’t want to register with the state and partners who are comfortable sharing personal liability for their business.

Which terms should be included in a partnership agreement?

Partnerships can be complex depending on the scope of business operations and the number of partners involved. To reduce the potential for complexities or conflicts among partners within this type of business structure, the creation of a partnership agreement is a necessity. A partnership agreement is the legal document that dictates the way a business is run and details the relationship between each partner.

Although each partnership agreement differs based on business objectives, certain terms should be detailed in the document, including percentage of ownership, division of profit and loss, length of the partnership, decision making and resolving disputes, partner authority, and withdrawal or death of a partner.

KEY TAKEAWAYS

• Many small businesses are organized as partnerships, which require formal documentation before being established.
• The partnership agreement spells out who owns what portion of the firm, how profits and losses will be split, and the assignment of roles and duties.
• The partnership agreement will also typically spell how out disputes are to be adjudicated and what happens if one of the partners dies prematurely.

Percentage of Ownership

Within the partnership agreement, individuals commit to what each partner is going to contribute to the business. Partners may agree to pay capital into the company as a cash contribution to help cover startup costs or contributions of equipment, and services or property may be pledged within the partnership agreement. Typically these contributions dictate the percentage of ownership each partner has in the business, and as such as are important terms within the partnership agreement.

Division of Profit and Loss

Partners can agree to share in profits and losses in line with their percentage of ownership, or this division can be allocated to each partner equally regardless of ownership stake. It is necessary these terms are detailed clearly in the partnership agreement in an effort to avoid conflicts throughout the life of the business. The partnership agreement should also dictate when profit can be withdrawn from the business.

Length of the Partnership

It is common for partnerships to continue operations for an unspecified amount of time, but there are instances where a business is designed to dissolve or end after reaching a specific milestone or a certain number of years. A partnership agreement should include this information, even when the time frame is unspecified.

Decision Making and Resolving Disputes

The most common conflicts in a partnership arise due to challenges with decision making and disputes between partners. Within the partnership agreement, terms are laid out regarding the decision-making process that may include a voting system or another method to enforce checks and balances among partners. In addition to decision-making procedures, a partnership agreement should include instructions on how to resolve disputes among partners. This is typically achieved through a mediation clause in the agreement meant to provide a means to resolve disagreements among partners without the need for court intervention.

Authority

Partner authority, also known as binding power, should also be defined within the agreement. Binding the business to a debt or other contractual agreement can expose the company to an unmanageable level of risk. To avoid this potentially costly situation, the partnership agreement should include terms relating to which partners hold the authority to bind the company and the process taken in those cases.

Withdrawal or Death

The rules for handling the departure of a partner due to death or withdrawal from the business should also be included in the agreement. These terms could include a buy and sell agreement detailing the valuation process or may require each partner to maintain a life insurance policy designating the other partners as the beneficiaries.