ComplianceFinanceLegalTax & AccountingNovember 27, 2020

Starting a partnership

There are basically two types of partnerships--general partnerships and limited partnerships. General partnerships are a risky way to operate the business because of personal liability concerns. A limited partner can avoid the personal liability, but loses the ability to participate in day-to-day decision-making
  • Contributions: Specify the amount and time of contributions to be made by each partner.
  • Management and control: Identify whether some or all of the general partners will manage and control the partnership.
  • Profit and loss sharing: Specify how the profits and losses will be allocated to the partners.
  • Distributions: Indicate when distributions of cash or property will be made.
  • Partner's responsibilities and duties: Describe the responsibilities of each general partner.
  • Withdrawal: Identify how a partner's interest will be valued if the partner withdraws from the partnership.
  • Death: Identify how a partner's interest will be valued if the partner dies.

    Additional topics to be included in a partnership agreement if applicable:

    Admission of partners: Indicate the process for admitting new general and limited partners into the partnership.

    Right of first refusal: Specify that the partnership or individual partners will have the right to purchase a withdrawing partner's interest before the partner can offer to sell the interest to someone outside the partnership.

    Duration of the partnership: Indicate the life of the partnership along with any events that may cause the partnership to dissolve prematurely.

    Continuation of the partnership: Identify the criteria to enable the partners to continue the partnership if an event causing the dissolution of the partnership occurs.  

    Warning

    A limited partnership is generally not regarded as the best choice of entity for a new business because of the required filings and administrative complexities. For a new business with two or more working partners, a general partnership is much easier to form. If a limited partnership is needed at a later date, the general partnership can easily convert to a limited partnership.

     

    There are some situations in which a limited partnership for a new business may be desirable. One such instance is a business in which the owner needs to raise capital yet still control the way the business is operated. If that applies to you, you might consider forming a limited partnership and selling limited partnership interests to investors. 

    Nikki Nelson
    Customer Service Manager
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