Starting a business can be a very daunting task. There are many moving parts that must be dealt with sometimes at breakneck speed. There is only one of you, and you cannot cover all of the bases yourself, no matter how hard you try. You may not possess the right skill set required to do certain functions well.
Then there is the need for capital. Partnerships help to address both of those concerns.
A partnership is not just a group of individuals getting together and operating a business hoping for profit. A partnership is a legal business structure where there is a sharing of monies, duties, and responsibilities to perform. There is the voluntary contribution of capital and the concomitant acquisition of equity in the
enterprise.
There are different types of partnerships. The most common are:
General, Limited, Limited Liability. Notice that I omitted “Silent”. That is because there is no such thing as a silent parent. It is a myth, a nice idea … until the “#@*% hits the fan!” The “silent” partner will no longer be silent when there is a major loss or a major gain.
The general partner is the partner with the most responsibility for the success of the business/venture. This partner has unlimited legal responsibility for everything that goes right… or wrong… in the business. This partner MUST issue periodic financial reports to the other types of partners AND give them periodic access to review the bookkeeping records of the business. Sometimes there are several general partners in a group. The duties and responsibilities of each general partner should be written and clearly delineated from the duties of other types of partners. Profits received by a general partner are subject to self-employment taxes, whereas the profits received by a limited partner are not.
The limited partner is the partner responsible for ONLY his/her narrowly defined duties within the organization but has no operating authority within the organization. There must be at least one general partner in every partnership. However, there can be many limited partners. (The legal limit is a maximum of 100, but in some cases it is limited to a maximum of 50). Some limited partners are only good for business development, or technology development, or other specialized knowledge that they bring to the table. Understand that limited partners can only get paid AFTER the general partner(s) gets paid. The profits paid to limited partners are not subject to self-employment taxes, but are subject to general income taxes.
The limited liability partner is the partner that puts up the money only, and agrees to have no say in the daily operations of the business. The limited liability partner’s liability for whatever goes wrong is limited to the amount of the partner’s financial investment. All partners share limited liability from the obligations of the venture, including malpractice lawsuits as a result of another partner’s professional acts or non-performance. Limited liability partners get paid as per their equity ownership in the project, and those payments are subject to self-employment taxes.
Regardless of which form of partnership you choose to engage in, remember to choose your partner(s) wisely. Character counts. If the person has a history of not following through on commitments, not listening carefully, being irrational, or being argumentative, then that person really should not be your partner.
Be VERY clear with your partner as to what your contribution(s) to the partnership will be and when the contributions will occur. Make sure you know exactly what your partner expects of you. Be very clear on what the partnership exit strategy is for you and when that can occur and under what terms and conditions.
Know the exact nature of the business of the partnership that you are entering into.
Remember: There is no partnership unless it is in writing! Verbal understandings and being friends does not count. Know your start date. Know what your contributions are to the partnership. Know your equity in the partnership. Ask how much equity other investors have in the partnership. Make sure your equity is commensurate with your contributions to the project. EVERYTHING is in writing, so be careful what you say. Caveat: If someone wants to be your partner, but does not want to put it in writing, then let that be your warning to disengage from that person and do not share any business information with him/her.
The basic partnership formation document should clearly spell out:
⚠️ Who… the partner is (the person´s full name and address)
⚠️ What… the legal name of the partnership will be, what is the primary business of the entity
⚠️ When… monies are to be paid (and under what terms and conditions), reports are to be issued
⚠️ Where… the entity is headquartered, where it will operate the business
How… the partnership can end, how the profits and proceeds will be distributed, as well as how you will be protected in the event that things go sour.
Lastly, the words of a major private investor: A dollar makes a better partner than a partner!
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