The first step you need to take in forming a business partnership is to figure out who is in the partnership. Partnerships can be formed with two or more partners, although Ennico points out that partnerships with large numbers of partners (more than 10) can become unwieldy to manage. Professional firms with 50 or more partners have extremely detailed agreements spelling out rigid procedures over who gets admitted, who signs the lease, the structure of the partnership, etc. "It can get very involved," Ennico says. Partners can include employees, spouses, family members, or associates. There may be reasons arguing against including a spouse as a partner; for example, if you transfer title to your personal assets into your spouse's name to protect your personal property in the event the partnership is sued, the spouse cannot have any involvement in the partnership business whatsoever, according to Ennico.
If you are teaming up with someone else to perform services for a mutual client (for example, a website developer who subcontracts the design work to another consultant) and do not with to make that person your formal business partner, make sure the other person signs an agreement stating clearly that they are not your partner or agent. Ennico further recommends that you notify the client in writing or by e-mail that you are NOT in partnership with that person. Otherwise, Ennico says there's a risk the client may view you as partners and will hold both of you accountable as such if something goes wrong.
Dig Deeper: 10 Questions to Ask a Potential Business Partner
Structuring a Business Partnership: General or Limited?
There are two types of partnerships. Which one is the right kind for you?
- General partnerships are formed when two or more people agree to enter into business together to make a profit. You don't even need to put anything in writing (although you should) or file any type of notice with state or local authorities. The feature that distinguishes this from other business arrangements -- and makes it a dangerous business form -- is the joint and several liability of the partners. That means each partner is liable for any debts of the partnership or of any partners on behalf of the business. "Try to avoid forming a partnership," Ennico says. "The operating agreement for a Limited Liability Company (LLC) contains almost all the same provisions as a partnership agreement, and the cost is about the same."
- Limited partnerships are a variation, in which a business partnership is comprised of at least one general partner and one limited partner. "The limited partner gets this name because he or she enjoyed limited personal liability," Weltman says. "The extent of exposure for partnership debts is essentially the limited partner's investment in the partnership." The limited partner is a silent partner, contributing money to the venture but without any right to direct how it operates or otherwise being involved in the running of the partnership business. Also, a limited partnership can only be formed by creating a formal agreement in accordance with state law and filing certain documents with your state Secretary of State's office. In a handful of states, you may also need to publish a "notice of formation" in local newspapers.
Dig Deeper: How to Choose the Right Legal Structure
Structuring a Business Partnership: Writing a Business Plan
While this exercise is not mandatory, it is extremely helpful to ensure success of a partnership. "The plan serves as a roadmap for the partnership to implement actions necessary to start up and grow the company," Weltman says. "It also is useful in making you focus on various aspects of the business, such as where you plan to obtain start-up capital and whether you will be selling through the Web." A business plan should describe the responsibilities of each partner for the business, including who will be the head or managing partner.
Structuring a Business Partnership: Choosing a Name
Finding the right name for your business can describe what the business is all about. "Frequently, the fact that the business is a partnership is explained by the name, such as Wang and Williams Associates," says Weltman. "Other times, the name may relate to the product or service being offered by the partnership." After choosing the name, you need to protect it. Do this by making sure a suitable Internet domain name is available for your partnership, as most businesses these days should establish a website. Even if you don't set up a website immediately, reserve the name by registering your site. Check availability of the name you want to use through Register.com or other domain name providers. You will also need to register your partnership name with a local government, for which there is usually a modest fee. And while it's not required, it's often a good idea to gain legal protection for your partnership in the form of a trademark. Learn about trademark protection from the U.S. Patent and Trademark Office.
Dig Deeper: Advice on Naming Your Business
