Running a Partnership
Safety Nets: Buy Sell Agreements, Partnership Agreements
Buy Sell Agreement
In order to safeguard the partnership from dissolution (in case one partner wants to leave the partnership or dies), you should create a “buy/sell agreement.” The buy/sell agreement outlines what happens to the partnership if one partner cannot contribute to the business anymore due to death, disability, or simply leaving the business. The agreement permits partners to buy-out the departing partner’s interest in the business.
Partnership Agreement
Another way to safeguard a business in New York is by creating a partnership agreement. In case of conflicts or disputes between partners, you may face problems resolving these issues if you do not spell out the rights and responsibilities in a written document. Furthermore, without this document, the New York State laws control the outcome of these disputes, which may be detrimental to the partnership.
The partnership agreement permits you to structure the partnership rules between you and your associates. This allows you to control the share of profits and losses being distributed, the responsibilities of each partner, what happens if one or more partners leave, individual authority and decision making, and voting power.
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There are a multitude of ways to calculate the value of the business. It could based on yearly earnings, value of company assets, appraisal by an outside source...etc. The buyout agreement will detail which of these methods you will use to put a value on the company. The best way to create this agreement would be through a lawyer. An accountant or business consultant can also help your create the agreements. There are also templates and software that assist you in creating partnership agreements. |
The Partnership Agreement
The following are major areas that you should think about when making your partnership agreement:
Name of the Partnership: This point is self explanatory; it is going to be your own name or an assumed business name.
Management Duties: Here you will set up guidelines on how to manage different aspects of your business such as accounting, supervising employees, and negotiating with suppliers.
Contributions to the Partnership: Partners should create a record of who is going to contribute what to the business, such as services, cash or property, and what ownership percentage each partner will have of the business.
Partners’ Authority and Decision-Making: Any partner can bind the partnership to a business deal (one exception to this rule is that a partner cannot bind the partnership to the sale of all its assets). With a written agreement, you can make clear that a partner will have to request consent from one or more partners before committing to a deal.
Allocations of Profit and Losses: You and your partners need to decide how to distribute the business income. Is it going to be directly proportional to the ownership in the business? Or will you and your partners agree to a different arrangement? Your partners will have different financial situations and preferences of how the money is distributed.
Resolving Disputes: You need to structure a way to resolve issues between the partners. It is important to establish a procedure for dispute resolution that is amenable to all partners.
Admitting New Partners: If you want to expand the business, get more investors, or locate key people who can contribute to your business (such as with contacts, influence or finding key customers), you will need a procedure on how to admit new partners.
Withdrawal or Death of a Partner: This is when your buy/sell agreement comes in play, outlining the procedures for a reasonable buyout that ensures the continuity of the business.
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The big advantage it has over the the corporation and LLC is that it is cheaper and easier to form. In most cases filing taxes is easier also. Many people start of as a sole prorietor or partnership, but later form an LCC or Corporation. |
Things to remember:
- You will report your business income or losses on your income taxes. The partnership must file an IRS form 1065, which defines each partner's share of profit and losses in the business, and an additional return each year. Furthermore, each partner must make a quarterly estimated tax return each year.
- There is no separation between your business assets and your own assets; you are personally liable for business debts or court judgments. Not only that but, there is the issue of Joint Authority and Joint liability in which a partner can bind other partners into a business deal (if there is not an agreement in place limiting authority) making the other partners personally liable as well.
- If a partner dies, retires, or simply leaves the business to pursue other ventures, the partnership will generally dissolve, assets and profits will be divided amongst partners after all the business obligations have been cleared. A buy-sell agreement can prevent this outcome.
- Without a written Partnership Agreement, New York State's laws will govern what will be the outcomes of the disputes amongst partners. The state default rules will apply.
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No. It is not required that you create these documents. In fact once you create the documents you do not "register" them anywhere, they are internal documents(you and your partners should have a copy). To start the partnership process check our Partnership To Do list |
Not interested in partnerships? Check out the Corporation or LLC section
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