BUSINESS WISDOM WEDNESDAYS: PARTNERSHIPS 101 SERIES


PARTNERSHIP AGREEMENT CHECKLIST

1. What is a partnership agreement?

A partnership agreement can be oral, written, or implied. The agreement addresses issues as it relates to the partners themselves or between the partners and the partnership. The partnership agreement can also include amendments.

3. Benefits of a Partnership Agreement

A partnership agreement can prevent a lot of unnecessary litigation and bickering. It will not prevent all lawsuits, but a well-drafted partnership agreement can certainly aid in reaching a settlement because it can spell out the available remedies if a dispute arises between partners.

2. Why do I need a partnership agreement?

A lot of business startups begin as family owned operations which can lead to any number of fights and disagreements between partners. Even if the business partners are not relatives, it is always a good idea for every business to have a written document that outlines each person’s responsibilities and obligations to each other and to the organization itself. Each partner should know her role as it relates to the other partner and the partnership.

In addition to defining the roles and relationships of the partners, partnership agreements also help outline a course of action in the event of one partner’s death or illness. It can plan for an eventual buyout of one partner’s interest.

A partnership is not defective if the partners never formally sit down and draft a partnership agreement. If a dispute arises between the partners, then the default rules under the Uniform Partnership Act (Cal. Corp. Code Section 16100, et seq.) will help define the partners’ rights and duties.

PARTNERSHIP AGREEMENT CHECKLIST

I.  Organization

  • Name and address of each partner
  • Partnership Address
  • Duration of Partnership

-Commencement Date

-End Date

  • Purpose of Partnership

II.  Capital Contributions

  • Amount of contributions required from each partner
  • Type of Capital Contribution: cash, services, property
  • Value of each contribution

III. Rights, Duties, and Liabilities of Each Partner

  • Management Decisions

-Decision making structure: partner, committee, majority

-Responsibility of each Partner

-Authority of each Partner

-Limitations on authority

  • Voting Power

-Percentage interest or per capita

-General and specific actions requiring a vote

-Tie-Breaking

IV. Financial Issues

  • Allocation of Profit and Loss
  • Assumption of Debts by Partners and/or the Partnership
  • Tax Issues
  • Distributions to Partners

-Right to Distribution

-Frequency of Distribution

  • Record Keeping
  • Accounting
  • Compensation of Partners

-Salaries

-Loans to Partner and from Partner

-Vacations

-Expenses

V. Transfer

  • Admitting new Partners
  • Limitations on admission

VI. Dissociation : Procedures and Effect on Partnership

  • Withdrawal
  • Death
  • Withdrawal
  • Buyout
  • Retirement
  • Expulsion
  • Confidentiality provisions after disassociation

VII. Winding up, Dissolution, and Liquidation

  • Procedures
  • Authority
  • Distribution of Assets
  • Allocation of Debts

VIII. Disputes Between Partners

  • Remedies and Settlement of Disputes
  • Attorney’s Fees

This is not a complete list. A partnership agreement should be rigid enough so the partners know what they can and cannot do. It should also be flexible enough to allow the partners to deal with unexpected issues as they arise. If you need help drafting your agreement, please contact an attorney licensed to practice in your jurisdiction.

Disclaimer: The contents on this blog are informational only and not meant, intended, nor should be considered legal advice, advertisement, or solicitation for business. The material posted on this blog is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Furthermore, the information contained on this blog is not specific to any particular set of circumstances. All links to outside information are meant to provide further information on the topic addressed, I make no warranties, express or implied, as to the accuracy of the information contained herein or in the attached links.

Partnerships 101

 

This will be the first post in a series regarding partnerships. First, I will begin with an overview of what a partnership is and how it is formed. The next post in the series will address partnership agreements. Stay tuned!

1. What is a partnership?

A partnership is when two or more persons enter into business together to make a profit. (California Corporations Code Section 16101(9).)

An oversimplified example: If you and your sister decide to open a clothing store together, you would be operating as a partnership.

2. Are there different types of partnerships?

There are two types of partnerships, General Partnerships and Limited Partnerships.

In a general partnership all partners are personally liable for the debts and liabilities of the partnership. In a limited partnership, the limited partners have limited liability and in exchange do not participate in the day-to-day management of the partnership.

3. How do you form a partnership?

General partnerships do not have any formal filing requirements with the Secretary of State. Limited partnerships do have formal filing requirements with the California Secretary of State. The forms can be found here.

4. Benefits of forming a Partnership

Minimal formalities for formation.

-Profits are not double taxed like in a corporate setting.

-Minimal reporting requirements to government agencies.

-Losses can be reported on individual income tax returns.

-No limits on the number of partners.

-Limited partners can enjoy limited liability and make equity investments. The general partners get the advantage of the additional capital without giving up managerial control.

5. Disadvantages of forming a Partnership

-If one partner dies, the partnership may terminate.

-Potential deadlock in 50/50 decision-making situations.

-Personal liability for partnership’s debts and obligations, unless you are a limited partner.

-Limited partners give up management and control for the limited liability, which means they have may have no say in the possible mismanagement of their investment in the partnership.

-Limited partnerships do have formal requirements for formation.

-The pass-through taxation may be subject to self-employment taxes and may increase tax liability at the end of the year.

by Attorney Judith Elaine Hoover on 08/08/12

Disclaimer: The contents on this blog are informational only and not meant, intended, nor should be considered legal advice, advertisement, or solicitation for business. The material posted on this blog is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Furthermore, the information contained on this blog is not specific to any particular set of circumstances. All links to outside information are meant to provide further information on the topic addressed, I make no warranties, express or implied, as to the accuracy of the information contained herein or in the attached links

Business Entity 101 – Sole Proprietorship

WHAT IS A SOLE PROPRIETORSHIP?

A sole proprietorship is a business that consists of only one person.  The business and the owner are the same person.

WHAT ARE THE DISADVANTAGES OF A SOLE PROPRIETORSHIP?

The sole proprietor’s assets are at risk for all of the debts and liabilities of the business. A sole proprietor can minimize the risks with insurance, but the liabilities may exceed the insurance leaving his assets at risk.

The ability to raise capital is also very limited. A sole proprietor cannot borrow funds as an investment and remain a sole proprietor.

WHAT ARE THE ADVANTAGES OF A SOLE PROPRIETORSHIP?

There are no corporate formalities. The sole proprietorship does not have to pay the minimum franchise tax that limited liability companies and corporations are required to pay.

HOW DO I TERMINATE A SOLE PROPRIETORSHIP?

A sole proprietorship terminates when the sole proprietor dies or becomes incapacitated. There are no formal procedures for terminating a sole proprietorship.

IF I DO PLAN TO OPERATE AS A SOLE PROPRIETOR, WHAT SHOULD I DO?

1. Buy insurance.

2. You still need to apply for and obtain business permits and applicable licenses.

(For more info on permits and licenses, please visit my previous post here.)

3. You need to report the business income. You will file a Schedule C when you prepare your taxes.

4. Maintain a separate bank account for the business.

by Attorney Judith Elaine Hoover on 06/27/12

Disclaimer: The contents on this blog are informational only and not meant, intended, nor should be considered legal advice, advertisement, or solicitation for business. The material posted on this blog is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Furthermore, the information contained on this blog is not specific to any particular set of circumstances. All links to outside information are meant to provide further information on the topic addressed, I make no warranties, express or implied, as to the accuracy of the information contained herein or in the attached links.

The Pros and Cons of Choosing an L.L.C.

 A Limited Liability Company (LLC) is a flexible form of organizing your business. It has two main benefits: partnership tax treatment and corporate limited liability.

1. PROS:

Generally speaking, a limited liability company (LLC) is a great choice for a small start-up business that wants to keep the business’s financial and managerial structure simple.

  • Limited Liability of the owners of the LLC similar to a corporation. The owners of a LLC are called members.
  • Conversion to a LLC from an existing unincorporated business is relatively easy.
  • Flexible Management structure so that the LLC can either be member-managed or manager-managed.
  • Pass-through Tax Treatment, which means a LLC can elect to be treated as a partnership for tax purposes. Unlike a corporation, there is no double taxation, and the members can “pass through” profits and losses.
  • Joint Ventures may find a LLC more attractive because there would be no need for a venturer to create a special-purpose corporation, yet he would have the added benefits of limited liability and pass-through taxation.

2. CONS: LLC cannot do any of the following:

  • Cannot be Publicly Traded, or a LLC will lose its partnership tax treatment.
  • Cannot be converted into an Incorporated Business,  unless the members are prepared for the conversion to cause a taxable event.
  • Cannot practice a profession
  • Cannot be formed by a business subject to a regulated industry.
  • Cannot exist perpetually.
  • Cannot be freely transferred.

I personally believe that the LLC PROS vastly outweigh the CONS for a small start-up company. Start with a solid business plan and that will help guide your decision-making. You should consult with a business attorney before plunging ahead.

by Attorney Judith Elaine Hoover on 07/20/11