Lesson 2: Type of Business
A partnership
The third kind of business entity is a partnership. A partnership is a group of natural and/or legal persons who sign an agreement to share the running of a business. The agreement also defines who is responsible for what, who invests, who gets the profits and how the partnership can be dissolved.
Partnerships can be general partnerships which means that all partners are responsible and liable for any of the actions of the partnership or they can be limited partnerships where one of the partners, the general or managing partner, has all the responsibility. For small businesses, partnerships are inherently more complicated and difficult to set up but they can guarantee that each of a group of people who together set up a business will benefit equally from the success of the business.
Joining a partnership will establish a separate business entity with its own identity and separate existence, just as for a company. Depending on how the partnership is set up, it will not automatically limit your liability and it will not automatically give you the same ability to minimize your taxes. To make sure of getting those benefits, you will have to incorporate separately and then have your company join the partnership. Such a complicated business structure is usually only justified when the businesses involved are quite large and very profitable.
The most difficult thing to put into such an agreement and one of the most essential is how the partnership can be wound down, dissolved or how each of the partners can leave without destroying the business. One way is to put a time limit on the partnership and document how it will be dissolved when the time comes. Another is to allow any partner or group of partners to offer to buy out any other partner at any time. If the other partner doesn't want to be bought out, he can top the offer and buy out the partners who made the original offer instead. Both methods are complicated and should have input from a legal professional.
At the small business level, partnerships are rare and are usually only justified if there is a group of two or more people, each of whom have something unique and essential to contribute to the proposed business. In that case, a simple partnership agreement detailing the contribution of each partner, the benefits each can expect and the responsibilities of each can be appropriate. Otherwise, stay with the other two business structures and keep things simple.
