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Ashley is an attorney. She has taught and written various introductory law courses.
Many businesses are structured as partnerships. Partnerships are one of the oldest and most popular forms of business and are typically easy and inexpensive to form. A partnership is a for-profit business established and run by two or more individuals. The individuals are known as partners and serve as co-owners of the business.
Each partner is responsible for the business. This means that each partner must contribute something to the partnership, such as funds, property, skills or labor. Each partner also shares the business profits, liabilities and losses.
For example, let's say that Dottie and Dave decide to open a clothing store. Their store will be called D.D.'s Duds. Dottie and Dave are partners. They don't need to do anything special in order to form the partnership. Once Dottie and Dave agree to form the business, it's automatically a partnership.
The two decide that Dottie will be responsible for buying the clothing and stocking the store. Dave will be responsible for everyday store operations. They'll both contribute money toward funding the store, and they'll split any profits. If the store loses money, then they'll split the losses, too.
Dottie and Dave don't need to file any special papers or forms in order to create their partnership. However, it would be wise for them to create a partnership agreement. This is a written agreement stating the terms of operation for the partnership. The agreement serves to protect the interests of each partner, as well as the business. Note that the agreement won't be enforceable unless it's in writing and signed by all partners.
A partnership agreement often includes:
Let's take a separate look at each of these items.
Dottie and Dave should decide beforehand who's responsible for business decisions. Once D.D.'s Duds is up and running, Dottie and Dave won't want business decisions inhibiting workflow and profits.
For example, let's say that Dottie's responsible for all business decisions related to buying clothing and stocking the store. Dottie decides to stock half the store with Josie's Jeans because Dottie's convinced these jeans will be popular this season.
Dave sees the jeans and disagrees. He can't imagine these jeans will sell. Rather than arguing the point and delaying clothing shipments, risking an empty store, Dave submits to the agreement. Dottie is in charge of making this decision for D.D.'s Duds.
Dottie and Dave also need to establish how the partnership will resolve disputes. Let's say the jeans aren't selling. Since Dave's responsible for everyday store operations, he decides to sell the jeans at 50% off. Dottie disagrees and thinks Dave is sacrificing store profits to spite her. Should the two head to court to settle the dispute? Court procedures are lengthy and expensive.
Instead, Dottie and Dave should include a mediation clause in their partnership agreement. This clause mandates that the partners submit to mediation procedures and the decision of a mediator on any major disputes regarding the business.
Dottie and Dave should also document their agreement regarding the split of profits and losses. For example, let's say that both Dottie and Dave contribute funding toward the business in order to get the business started. Dottie contributes 60%, and Dave contributes 40%.
Accordingly, Dottie and Dave decide that Dottie will be a 60% owner of the business, and Dave will be a 40% owner of the business. They decide that Dottie will receive 60% of the store's profits, and Dave will receive 40%. Dottie, especially, has an interest in putting this agreement in writing.
Now, what about the business' losses? Normally, the losses are allocated according to ownership percentage. However, Dottie and Dave can agree on something different if they'd like. Let's say they decide to split the losses 50/50. They just need to include this arrangement in their written partnership agreement.
Dottie and Dave next need to decide who has the authority to bind the business through contracts and when that authority may be exercised. For example, let's say neither Dottie nor Dave has the authority to bind the business to an obligation worth more than $10,000 without first obtaining the other partner's consent.
Let's say Dottie wants to order $20,000 worth of jeans for the store. Before Dottie orders so many jeans, Dave must first agree. This keeps either partner from obligating the business through risky or impractical deals.
The two should also decide what happens when a partner wants to leave the business. Dottie and Dave should include a buy/sell agreement in their partnership agreement. The buy/sell agreement should outline when and how a partnership can be transferred to another person.
Let's say Dottie wants to sell her 60% interest to her brother, Donnie. However, Dave doesn't want to be partners with Donnie. Hopefully, the partners included an arrangement where Dave can approve or deny the proposed new partnership or perhaps have the first right to buy Dottie's interest for himself.
Lastly, Dottie and Dave should establish how to dissolve the partnership. Let's say the business isn't doing well, and both partners want out. A dissolution of the partnership can occur through several different methods, including the withdrawal of one or more partners.
Dottie and Dave need to decide if the partnership will last for a specific period of time or indefinitely. They should also establish the terms necessary for dissolving the partnership by agreement of the two partners. What if Dottie simply says, 'I want out?' Is this enough to dissolve the partnership or must Dave have the opportunity to save the partnership in some way?
There may also be some circumstances in which a partner can be expelled from the partnership, thus dissolving the partnership. Dottie and Dave should outline these circumstances so that each is clear regarding the ramifications of certain behavior.
Let's review. A partnership is a for-profit business established and run by two or more individuals. The individuals are known as partners and serve as co-owners of the business. Each partner is responsible for the business. Each partner shares the business profits, liabilities and losses.
Partnerships are a popular form of business. They are one of the oldest types of business and are typically easy and inexpensive to form. There are no formal or legal requirements necessary when forming a partnership. However, it's advisable for partners to execute a partnership agreement. This is a written agreement stating the terms of operation for the partnership.
A partnership agreement serves to protect the interests of each partner, as well as the business. It must be in writing and signed by all partners in order to be enforceable.
A partnership agreement should include:
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Back To CourseBusiness Law Textbook
23 chapters | 176 lessons