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Did you know there are several partnership structures you can choose from when forming a partnership Partnerships are a popular business structure to form if you plan to go into business with another person. You might choose a trusted family member, friend, colleague or even a mentor. Two or more people enter into a partnership and establish an agreement. This agreement allows them to start and operate a business as a team. Partnerships require a strong work ethic as well as the ability to support one another, make decisions together and maintain an avid interest in the business and its growth and success.
Every partnership is different, so it’s important to choose a structure that works best at meeting the needs of each partner in the business.
Let’s look at some of the most common partnership structures:
- General partnership
- Joint venture partnership
- Silent partnership
- Limited liability partnership (LLP)
The most common is a general partnership. It is so popular that we even outlined a bit of how a general partnership works in the opening of this article. In a general partnership, two or more partners establish a written partnership agreement. This agreement details how the company will be run among its partners. Additional details include notes on how profits, liabilities and management duties will be equally divided among each partner.
If you decide to form a general partnership, it is highly recommended that you incorporate or form a limited liability company (LLC) for the business. This is because a general partnership is considered an unincorporated business. The entity does not have limited liability protection to protect the personal assets of its partners and is even regarded as a sole proprietorship in that respect. Incorporating or forming an LLC provides a general partnership with limited liability protection, ensuring peace of mind for all partners.
Joint venture partnership
A joint venture partnership is unique in that out of all the partnership structures, it’s the only one with an expiration date. This partnership is designed to be temporary.
Partners who choose to form a joint venture partnership may do so for specific reasons. For example, they might decide to complete a certain phase of the company’s development or speed up certain business processes using the structure. After the processes or phases have been met, the joint venture partnership expires.
Not all partners in a partnership may wish to be involved in the daily ongoings of the business. Is there a partnership type for partners who wish to be less vocal?
Meet the silent partnership. This differs from other partnership structures because one partner is allowed to be less active within the company. More often than not, this partner provides capital within the partnership in exchange for less visibility and involvement. The other partner, or partners, will then assume more of the day-to-day responsibilities and divide the workload accordingly.
Limited liability partnership (LLP)
Partners in certain licensed professions who wish to form partnerships together may opt for a limited liability partnership (LLP). An LLP protects partners in licensed professions from consequences that may stem from the negligence or malpractice of another partner.
Forming this type of partnership requires being in a licensed profession, such as a doctor, lawyer or accountant. You may be asked to provide proof of your licensed profession, such as a state-issued license, when filing to form an LLP. Additionally, the laws for the LLP structure differ from state to state. Check in with your local secretary of state in the state in which you plan to conduct business to make sure they have authorized LLP legislation.
Partnership pro tips
If you do decide to form a partnership, it is wise that you draft a written partnership agreement and obtain a federal tax ID.
We mentioned the written partnership agreement in passing earlier. This document acts as the foundation of the partnership. It outlines specific details, terms and clauses surrounding the partnership. For example, you may use your written partnership agreement to detail the official start date of the partnership and the roles and responsibilities each partner plays in the partnership. Additional information such as the rules for admitting a new partner and voluntary or involuntary withdrawal of a partner may be detailed in this document. Keep a few copies on hand for all partners to access and review.
In addition, it’s wise to obtain a federal tax ID. This is also known as an employer identification number, or EIN. The IRS issues these nine-digit numbers to help identify and track employer tax accounts. An EIN may be used to identify the business in lieu of a social security number (SSN).
Some small business owners, like sole proprietors, may use their SSN on legal documents in lieu of an EIN. However, this is not possible in a partnership where there may be two or more members. It is advised that at least one partner in the partnership obtains an EIN and applies it for use on legal documents.
Bonus: In the event your partnership decides to hire employees, you will already have this tax ID — which is a hiring requirement!
Key takeaways: Which partnership is best for my business?
This is a brief overview of the different partnership structures you may decide to form for your small business.
Discuss these options with your partner. Make sure each person has their say in the partnership you’d like to form together. In the event you still have questions about the process or are curious about incorporating as another entity formation, consult a legal professional, CPA or accountant. They may be able to answer additional questions you have about forming a partnership and provide guidance tailored to your needs.