The Small Business Administration “SBA” states that “a partnership is a single business where two or more people share ownership.” Allow our partnership lawyers help you draft a partnership agreement that will help all owners of your partnership.
In a partnership, each partner contributes to all aspects of the business, including money, property, labor or skill. And in return, each partner shares in the profits and losses of the business.
Since a partnerships requires more than one person to be involved in the decision-making process, it’s important that the partners discuss a wide variety of issues up front and develop a legal partnership agreement prior to commencing a business partnership. This partnership agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one. If you are considering entering into a partnership with another, we strongly suggest you speak to us or another attorney prior to commencing business.
Types of Partnerships
There are three general types of partnership arrangements that are discussed on this page:
- General Partnerships assume that profits, liability and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
- Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects.
- Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.
Forming a Partnership
To form a partnership, you must register your business with the Florida Department of State Division of Corporations. You’ll also need to establish your business name. For partnerships, your legal name is the name given in your partnership agreement or the last names of the partners. We strongly advise you to perform a name clearance search prior to selecting a business name to do business in Florida. For if a trademark infringement lawsuit is filed against your company, you individually may be liable for damages to the party whom placed the action. If you choose to operate under a name different than the officially registered name, you will most likely have to file a fictitious name in Florida, again, perform a name clearance search prior to registering the fictitious name.
Once your business is registered in Florida, you must obtain Federal, State and Local business licenses and permits to operate your business.
Your Florida partnership shall need to register the business with the IRS and with state and local revenue agencies in order to obtain a tax ID number or permits.
A Florida partnership must file an “annual information return” to report the income, deductions, gains and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business “passes through” any profits or losses to its partners. Partners include their respective share of the partnership’s income or loss on their personal tax returns.
Partnership taxes generally include: Annual Return of Income; Employment Taxes; and Excise Taxes. Partners in the partnership are responsible for several additional taxes, including: Income Tax; Self-Employment Tax; and Estimated Tax. Partners are not employees of the business and should not be issued a Form W-2.
Advantages of a Partnership
The SBA states that the following are the advantages of forming a partnership:
- Partnerships are easy and Inexpensive to operate. Partnerships are generally an inexpensive and easily formed business structure. The majority of time spent starting a partnership often focuses on developing the partnership agreement.
- Partners shared financial commitment in accordance to their partnership agreements. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling your seed money.
- Partnerships allow each partner to offer their own complementary skills to the business. A good partnership should reap the benefits of being able to utilize the strengths, resources and expertise of each partner.
- Partnerships provides incentives to employees to become partners. Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.
Disadvantages of a Partnership
The SBA states that the following are the disadvantages of forming a partnership:
- Each partner shall be jointly and Individual liable to third parties for the acts of the business. Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt.
- Disagreements amongst partners. With multiple partners, there are bound to be disagreements Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible, for this reason, it is imperative that a partnership agreement is drafted prior to commencing business that will address how disputes will be resolved amongst the partners.
- Shared profits amongst partners. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners, this often happens and the only manner in which to address the issue is by drafting a clear partnership agreement amongst the partners prior to commencing the business venture.