Great news: You have a found a partner to go into business with, and you both have a grand vision for your product or service.
Now, it’s time to form a partnership and a business partnership agreement.
“A partnership is the relationship existing between two or more persons who join to carry on a trade or business,” says the IRS. “Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business.”
Partnerships must file an annual information return to report on income, losses, and more from its operations. In addition, income tax passes through the partnership to the partners, who include income or loss on their own tax returns.
Partners are not considered employees and should not be issued a W-2.
The IRS goes on to say that partnerships may be liable for:
- Annual return of income
- Employment taxes, such as Social Security, Medicare, unemployment, and depositing employment
- Excise taxes
The individual partners in a partnership may be liable for:
- Income tax
- Self-employment tax
- Estimated tax
Several types of partnerships exist.
Illinois, for instance, features business structures that include a general partnership, a limited partnership, and a limited liability partnership. Missouri has all of those, as well as a limited liability limited partnership. Check your state’s small business information to learn which type of partnership is best for you.
A partnership agreement is something that is recommended, although it’s not necessarily required. The agreement helps protect you and your other partner(s) when it comes to making decisions, sharing profits and losses, and dissolving the company.
Here are several factors to include in your partnership agreement.
- Ownership - This area helps determine what the business owns and what individual partners own. Plus, here is where you define the percentage of the company each partner owns.
- Contributions - Spell out what each partner will contribute to the business. In an extreme case, a partner may contribute all of the money and none of the work, or vice versa. List each partner’s contributions and responsibilities.
- Profits and Losses - This section should detail how to allocate profits and losses among each partner.
Decision Making - Some decisions may be made by a single partner, while others may require a vote among the partners. Mitigate risk by addressing these concerns.
- Life Events - What happens to your business if a partner retires or dies, of if your business is bought out? What if you decide you want to dissolve your business? Consider what happens when these types of life events affect your business.
- Dispute Resolution - Partnerships may have a cheery beginning, but beware of how to solve disputes that arise between partners.
For more information, visit the Small Business Administration’s guide on Six Elements Every Partnership Agreement Needs.
Or, contact Sivia Law to learn how we can help draft a business partnership agreement for you.