Finding a Partner
Sometimes, the best source of help for your consulting service is offered by a working or financial partner. The Uniform Partnership Act (UPA), adopted by many states, defines a partnership as “an association of two or more persons to carry on as co-owners of a business for profit.” How the partnership is structured, the powers and limitations of each partner, and their participation in the business are written into a document called the articles of partnership. The articles or descriptions can be written by the partners, found in a legal form from a stationery store, or written by an attorney. Obviously, using an attorney is the best option because it will ensure that the document is binding and reduce disputes that typically come up once the business is growing.
Articles of Partnership
Your firm's articles of partnership should include:
The name, location, length, and purpose of the partnership
The type of partnership
A definition of the partners' individual contributions
An agreement on how business expenses will be handled
An outline of the authority of each partner
A summary of the accounting methods that will be used
A definition of how profits and losses will be distributed among the partners
The salaries and capital draws for each partner
An agreement of how the partnership will be modified or terminated, including dissolution of the partnership by death or disability of a member or by the decision of partners to disband
A description of how the members will arbitrate and settle disputes as well as change terms of the partnership agreement
Partnerships are easier and less costly to form than corporations. In most states, all that's really needed is the articles of partnership.
How can I find out more about how partnerships are formed and taxed?
The Federal Internal Revenue Service (
Help with Capital
A partnership can typically raise capital more easily than a sole proprietorship. This is because there are more people whose assets can be combined as equity for the loan. Lenders will look at the credit ratings of each partner, so make sure your business partners have good credit. Partnerships are frequently more flexible in the decision-making process than a corporation, but less flexible than a proprietorship.
Like proprietorships, partnerships offer relative freedom from government control and special taxation. A partnership doesn't pay income tax. Rather, all profits and losses flow through the partnership to the individual partners, who pay income and other taxes as if they were sole proprietors.
Downside of Partnerships
Of course, there are some minuses to partnerships. At least one partner will be a general partner and will assume unlimited liability for the business. A general partner should get sufficient insurance coverage to reduce the risk from physical loss or personal injury, but the general partner is still liable.
A partnership is as stable or as unstable as its members. Elimination of any partner often means automatic dissolution of the partnership. However, the business can continue to operate if the agreement includes provisions for the right of survivorship and possible creation of a new partnership. Partnership insurance can assist surviving partners in purchasing the equity of a deceased partner.
A partnership is similar to a marriage. It requires common goals, shared responsibilities, communication, and trust. Make sure the partner you select for your consulting business shares your goals, has defined responsibilities and authority, and maintains a line of communication.
Though a partnership has less difficulty in getting financing than a sole proprietorship, the fragile nature of partnerships sometimes makes it difficult to get long-term financing. The best source, as discussed earlier, is using the combined equity of the partners from assets they own as individuals. In fact, many partnerships are started because an active partner needs equity or financing that she cannot get without a partner with more assets or better credit.
Depending upon how the partnership agreement is drawn up, any partner may be able to bind all of the partners to financial obligations. Make sure your articles of partnership accurately reflects your intent regarding how partners can or cannot obligate the partnership. Also consider the advantages and disadvantages of structuring your partnership as a limited liability company.
A major drawback to partnerships is the difficulty faced when arranging the departure of a partner. Buying out the partner's interest may be difficult unless terms have been specifically worked out in the partnership agreement.
Get Legal Advice
As you can see, there are numerous pluses and minuses to partnerships. Many of the disadvantages can be addressed in your articles of partnership. This is why it is recommended that you use an attorney experienced in such agreements as you construct your partnership. The cost is usually less than the value.
