Starting With the Right Legal Business Type, Partnership

Having spent time working in several countries, across 3 continents, one of the business types I have found to be commonly used to trade under, is a Partnership.

The thing about partnerships though is that there appears to be various forms of this type of business available depending on which country you live in. In some instances even the state or province you trade in will affect the options available to you.

Noting the significant differences between the available types of partnerships, I would strongly suggest that you discuss your options with your local accountant and lawyer in some detail before starting out. Making sure that your business meets your specific needs in this instance is especially important.

Despite the significant differences there are a few common traits, that are specific to this type of business, including:

1. Two or more people doing business together under the same name.

This is naturally the most common characteristic of this type of business. You and a friend want to start a business together, this may be the type of business for you. In most locations it is possible to register a trade name for your partnership, and it may even be possible to register your partnership as a separate legal entity. Make sure to explore your options thoroughly as your financial wellbeing may well depend on it.

2. Governed by a partnership agreement.

Though it is possible to setup a partnership type business without a partnership agreement, not having an agreement would be like dropping yourself in the middle of the ocean with no hope of rescue. The reality is that when money is involved, people tend to change, and often these changes have devastating affects on both your relationship with your partners, and your business.

In fact, no matter what type of partnership you start, make sure that there is a clear partnership agreement that defines everything from investment required to sharing of liabilities and assets, in the event of dissolution. Defining partner duties and obligations in this agreement as well, may just save your business in the future. And of course in doing so, make sure to be specific.

3. It is usually relatively easy to dissolve.

If your partnership was not registered as a legal entity it is usually easy to dissolve from a legal perspective. You can simply stop trading in your partnership name and terminate your partnership in the manner defined by your partnership agreement. Notably though if the partnership is a legal entity this may be a little more difficult.

One practical consideration that often complicates dissolution of partnerships would be distribution of assets and liabilities (debts). Questions like who will keep the client list or the office location if the partnership is dissolved, will often become hugely disputed issues, and so it is especially important to define asset and liability distribution in your partnership agreement. My suggestion is to treat the partnership agreement like a prenuptial agreement. It is easier to define this aspect upfront when you and your partners are on good terms, than trying to sort it out when you are not.

4. Personal liability could be limited, unlimited or even somewhere in between.

Depending on the partnership type it is important to realize that in the worst of these, you could be responsible for debts your partner incurs, even without your knowledge. This means that if your partner makes a mess, you could lose your house as well.

Notably there are various types of Partnerships available and depending on your location, levels of liability may vary from total, all the way through to hardly any. It is thus essential that you get proper advice to ensure that you are comfortable with what you are buying into. Also understand that no matter the partnership type you get involved in, a very high measure of trust between partners is essential to ensure long standing success.

5. You are unable to sell the business, you can only sell the assets

Since the partnership usually depends on two or more people working together, it is often hard to sell that relationship. Your old partners would have to accept the new partner, and the new partner would have to accept the terms of your existing partnership agreement, which I might add, would prove very complicated from a legal perspective. Also in most cases partnerships are not legal entities and so the only option is to sell the assets of the business, which may include good will, client lists and usually some physical assets.

This is of course further complicated if one partner wants to sell, and the other does not. A dissolution and subsequent distribution of assets is often the natural outcome of this type of situation.

6. Taxation is usually based on a personal tax model.

Notably since most of the partnerships are not separate legal entities, the profits of a partnership are taxed as if personal income. Unfortunately due to the various types of partnerships, establishing your individual tax liability and how it is calculated will significantly depend on how your partnership is set up. Be aware though that in some arrangements, the tax man could hold you responsible for the unpaid taxes of other partners.

In conclusion it is easy see that this type of business is varying and potentially complex. And though often easy to set up, partnerships are usually established when things are going well, often ignoring the potential pitfalls completely. This then result in significant headaches and often insurmountable challenges down the road, when things are not going as well. And since there are other options available for doing business, my advice would be that you rather consider an alternative, if at all possible.

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