What You Need To Know About Partnership Legality
Entering into partnerships with a business colleague can be a fantastic fit for many business owners. However, there are two main clarifications that you must make to ensure that the partnership you are about to undertake (or are currently in) is legal:
First, do you have a joint venture or a partnership?
Second, have you followed all appropriate steps to make your partnership legal?
Any business owner entering into any business dealings should have an LLC. If you have follow-up questions on this, read more here. This will take on more meaning here in a moment, but for now, know this: if you have more than one person involved in your LLC, you should have the Multi-Member Operating Agreement.
Without getting bogged down in the legalese around the subject, a joint venture occurs when two (or more) parties (with their own business entities) enter into a contractual agreement joining them together for a specific business undertaking. A Joint Venture Agreement is critical in these instances, as this business endeavor will be to fulfill a specific purpose or enterprise, rather than to enter into a general business together. The parties will each contribute property, effort, money, etc for the endeavor, and will result in factors such as a joint proprietary interest in the endeavor, and rights to share in the profits and losses (all of which should be specified in the Joint Venture Agreement).
A partnership, on the other hand, occurs when two or more people enter into an association as co-owners of a single business enterprise. This business model is a type of formation recognized by states and the IRS. In a partnership, partners agree to share profits, losses, and liability, and will endure until the partnership is wound up (rather than when a business venture ends, such as in a JV).
So, what do you need to know to keep your partnership legal?
Because you are entering into a business arrangement with another person, it is critical that you take every single precaution available to protect both yourself and your partner. It does not matter if you’re entering into a business arrangement with your best friend in the entire world, that is all the more reason to protect both yourself and your partner. You have absolutely no way of controlling the unexpected events that could possibly occur, and some of the worst stories I have encountered in my practice occurred when a tragedy occurred in partnerships.
Partners have a duty of loyalty to the other partner(s), which means that partners are essentially beholden to the actions (whether they be good or bad) of their fellow partner. Because of this, it is critical that partners clarify the exact roles of each partner, including how profits and losses will be shared, the roles of each partner within the business, and more. These roles must be clarified in a Partnership Agreement. The most important document that a partnership can have is a Buy-Sell Agreement, which is often one of the most overlooked documents for most new partnerships. However, this is a document that sophisticated partnerships know they must have to protect themselves from the unknown. Buy-Sell Agreements define what the partners agree to in certain circumstances prior to those circumstances actually occurring. For the same reason that you would create an estate plan to protect your loved ones from having to deal with your loose ends during an incredibly difficult time in their lives, a Buy-Sell Agreement can help eliminate frustration, animosity, or hardship during difficult times. For example, Buy-Sells will define what occurs during “triggering events” that range from the expected (such as retirement or voluntary departure) to the unexpected (incapacitation, involuntary departure, or even death). These are all scenarios that you would not want to leave undecided until they occur and when tensions and emotions are high.
At the end of the day, taking simple steps to protect your partnership will be the most important action you can take as a business owner. If you’d like more information regarding partnerships, or to set up a specific Buy-Sell appointment, you may do so here.