What is a Business Partnership? David Rivero

 Published:  10/01/2024  | Updated:  10/01/2024

In business terms, a partnership carries very specific meanings. There are many benefits to a business partnership, even for a small business.

But there are also a lot of risks that you're likely to get the bad end of if you don't understand exactly what a business partnership is, how it works, and what is expected of you.

In this article, we answer all the questions you might have about business partnership agreements.

What is a Business Partnership?

A business partnership is a legal arrangement between two or more entities established to advance the mutual interests of all participating parties.

Business partners can be individual partners, companies, and organizations.

Here, business partners specifically refer to individuals who agree as co-owners. However, the devil is in the details and there are different forms of business partnership where the relationship works out differently.

 

How Does a Business Partnership Work?

In loose terms, two or more business partners join together with their capital and other non-financial resources to maximize the efficiency of the business. Then set to share both profits and losses.

The business partnership may be the birth of the business or the new partners could join in pre-existing partnerships with other partners.

According to the type of partnership agreement established, the different roles and responsibilities will be put in a written partnership agreement.

 

What is a Partnership Agreement?

A partnership agreement in business is a contract defining the legal relationship between all parties involved in starting the partnership business.

It defines the roles, responsibilities, and rights of every party and must be signed by all parties involved.

Unless there is a particular type of partnership established, the contract treats all partners as equal co-owners in sharing the income, debt, and losses as well as in distributing the responsibilities.

 

Types of Partnerships:

There are more specific types of business partnerships.

They are:

General Business Partnership

A general partnership in business is a basic partnership agreement where two or more individuals lead a jointly-owned business.

In general partnership agreements, assets, responsibilities in day-to-day operations, profits, and losses, as well as any legal liability are shared equally between the partners. Here, there's unlimited personal liability for all partners in business management.

Limited Partnership

A limited business partnership is mostly similar to a general business partnership agreement with a few important differences.

Whereas a general business partnership agreement must at least have two general partners, limited business partnership agreements must have one general partner and one limited partner.

Unlike general partners, limited partners don't have the same management responsibilities as equity partners and don't make business decisions.

Legally, they are only limitedly liable to the amount they invest. Limited partners are often called silent partners for that reason.

Only limited partners can invest and take no part in the business operations themselves.

Limited Liability Partnership

Limited liability partnerships, on the other hand, have no general partners and all limited partners.

The partnership agreement safeguards all partners from the damage done by other partners. Each limited partner is only liable for the amount they put into the business partnership.

Is a Partnership Agreement Like a Limited Liability Company?

While a limited liability partnership agreement is similar to a limited liability company, it's not the same. Mainly in business structure and taxes.

The differences could become more striking and important depending on the state and the state law.

An LLC is a legal entity somewhere between a corporation and a partnership agreement. In limited partnerships, limited partners are held liable for their negligence or mistakes as they are still considered co-owners.

In LLC, the individual "partners" are considered members, and therefore protected through the business entity itself. There, the directors are responsible for operating the business entities.

What is the Difference Between Shareholders and a Business Partner?

Of course, as the types of partnerships differ, the difference between one or more partners and shareholders differs more.

But generally, a partnership agreement is considered a sole proprietorship while a company is its separate legal entity.

In a partnership agreement, especially a general partnership. the partners are the sole proprietors who share the ownership stake. General partners participate in the liability for the company's debts and other financial obligations.

And even limited partners are liable for their part. Unlike business partnerships, stockholders don't have such obligations and have no personal liability in the business's debts.

How does Payment Work in a Business Partnership?

In a partnership business, co-owners aren't salaried partners. Rather they share profits and losses. They earn based on the distribution of profits according to the terms established in the contract of the new business.

How Do Taxes Work in a Business Partnership?

Partnership business doesn't turn in income tax. Each partner has to pay income tax on their share of the profits.

It's included in the personal tax return. So the partnership income tax is passed off to the partners.

When it comes to limited partners, the IRS views it as a passive income tax rather than earned income.

How to Set Up a Partnership Agreement?

After having all the important discussions with your to-be partner, you and your business partner should establish the draft with a lawyer.

A documented partnership business agreement is very important.

How Can You Join a Pre-existing Partnership?

With the signed consent of all existing partners, you can join an existing partnership the same way you begin a new one. The existing business will have to be reconstituted in all types of partnerships.

Within contributing to the business assets, you'll have the right to share in the assets, profits, and losses, depending on what type of partner you'll be.

Benefits of a Business Partnership- Why Should You Set Up One?

There are advantages and disadvantages to the partnership structure. But in many cases, if you're with the right people with the same goals, especially if it's a small business, the benefits outweigh the possible risks.

• More than one person contributes money, so start-up costs are less and more manageable.

• More expertise on board.

• A better support system in difficult times

• Potential tax benefits depending on the state and partnership structure

A business partnership could be one of the best decisions you make for your business. However, like any relationship, especially a legal relationship, it can be tricky and has to be thought-out through.

At Davidrivero.com, we post weekly blogs about business and entrepreneurship so follow us to get more advice from like-minded people that will help you embark on that difficult but exciting road!