When starting a business with another person, it’s essential to have a general partnership agreement in place. This document outlines the roles and responsibilities of each partner, as well as how you will share profits and losses. Without this agreement, you and your partner may not be on the same page regarding running your business. In this blog post, we’ll discuss the critical components of a general partnership agreement, so you can make sure your business is set up for success!
How to Form a Business Partnership
Forming a general partnership does not require filing with the NC Secretary of State. However, if your partnership decides to name itself something other than the combination of all partners’ names, you must register an assumed business name with the Secretary of State. Before committing to a business name, make sure it is one of a kind – no other competitors should share the same name.
You may also wish to file a trademark registration to protect your brand name and logos for your goods and services.
Why Write a Partnership Agreement?
While having a written agreement with your partner about your general partnership is not compulsory, but having one creates clarity and decreases disagreements. Despite this, many general partnerships do not draft an agreement ahead of time – only to regret their decision later.
Without writing out your thoughts, you or your partner may remember a spoken conversation differently. Therefore, writing a partnership agreement should be seen as an essential starting point for any business venture.
Without recording the details in a legal document, both partners can have misunderstandings and disagree on who holds what responsibilities. Additionally, financial issues such as taxes, ownership interest, or debt can cause significant rifts if not clearly defined from the start. A written agreement is essential to avoid future disputes in any general partnership scenario.
Meeting with a business attorney can help you draft your partnership agreement. It should include both of your expectations so that there is no misunderstanding.
Responsibilities in a Partnership
When you create a general partnership, the owners are responsible for running their business and contributing to its capital. To ensure you both agree on how to do things in your business venture, working out a verbal or written official partnership agreement is essential.
A well-written partnership agreement should contain all necessary information regarding responsibilities within the partnership as well as how any decisions made by one partner can affect other partners.
This agreement lays out partnership details and outlines:
- Your role and responsibilities in the business
- Your partner’s role and responsibilities in the business
- How you will make business decisions together
- What will happen if one partner decides to leave the company (2)
Before establishing a general or limited liability partnership, it is essential to ascertain whether this business structure will suit your firm.
To make the most informed decision, you must carefully consider both the benefits and drawbacks of personal responsibility and determine if you are ready for joint management with someone else.
Your Written General Partnership Agreement
Establishing strong partnership agreements now can help ensure that the foundation of your business remains intact in the future.
Some essential items for your agreement include:
A Partner’s Initial Capital Contribution
A partner’s initial capital contribution is a monetary investment to fund a business. A partnership uses this money to purchase assets, pay operating costs, and establish a reserve fund.
- Who will make financial contributions, and how much? Will there be additional capital contributions by partners?
- Any limits to contributions to partnership funds?
- How will you keep records of transactions?
Business Responsibilities and Contributions
This section outlines the specific roles for each general and managing partner, as well as who is authorized to make decisions, sign contracts, and more.
- Which general partner will do what?
- What are their levels of authority?
- Who makes the decisions? Is there voting? How does it work?
- Who will manage the general partnership?
All the Partners’ Duties and Responsibilities
This section outlines what each general partner is responsible for and their decision-making authority.
- Who manages the day-to-day operations?
- What are each partner’s duties?
- Who will handle what tasks?
- How much decision-making power does each partner have?
Dispute Resolution
Outline how you will handle conflicts between partners. You could include arbitration, mediation, or using a third party to help resolve disputes.
Partnership Structure, Profit and Loss Sharing
This section outlines how you will share profits and losses and also details who is responsible for debts and liabilities. It also specifies how each general partner will receive their portion of the income from the business.
- How will general partners share profits and losses?
- Will a general partner be in charge of distributing the profits and losses?
- How will profits be divided?
- What percentage of losses will each general partner take responsibility for?
- Who is liable for debts incurred by the general partnership?
- Whether and when to bring on another partner or limited partner
- What happens if your general partnership goes bankrupt?
Partnership Dissolution Procedure
This section outlines how you will dissolve the general partnership and details who has the authority to handle the process.
- What will happen if one general partner wants to opt out of the general partnership?
- How will assets be divided and debts paid off?
- What happens if a partner dies?
- Who will control the general partnership affairs when it’s time to dissolve?
- Who has the right to liquidate assets?
- How will partners distribute profits and losses when the general partnership ends?
Future Considerations
Consider whether your general partnership may someday convert into a different type of business structure such as an LLC or LP. When will this happen?
Taking the time to consider the above factors in your partnership contract is essential for a profitable business. There will be fewer disagreements by ensuring everyone involved in partnership business understands their role and responsibilities.
Forming a Partnership in North Carolina
Working out business details can prevent financial losses and strife with your partner. Even though the state does not require some steps for a general partnership, consider taking them. Your business is worth a bit of planning.
You may consider a need for liability protection. In that case, you can create a Limited Liability Partnership.
Crucial steps to set up a partnership include:
- File with the Secretary of State (mandatory for LLP but not general partnership)
- Assumed Name: If partners decide on a name other than the names of the general partners, file a certificate of assumed name with the Register of Deeds Office
- Partnership Agreement: This written or oral agreement determines how you govern your partnership. Consulting a business attorney to help draw up your agreement can prevent financial loss and strife.
- Consider whether you need employees: Look at unemployment insurance and worker’s compensation considerations with your business attorney.
- Ensure that you meet wage requirements for any employees.
- Open a business banking account.
- Choose a location and rent, buy, or open a “home office.”
- Obtain licenses, permits, and zoning clearances: Your business may need to file for federal, state, county, and city licensing or permits. Talk with a knowledgeable business attorney to understand the exact requirements in your area and field.
- Consider filing any trademark registrations, especially if you design a brand icon.
- Obtain Employer Identification and State Department of Revenue numbers.
Tax Considerations
The Federal government taxes partnerships as pass-through entities, meaning that the business itself does not owe any taxes. Consequently, the IRS imposes taxation on partners at an individual level, depending on their share of earnings from their general partnership.
To save on taxes and make the most of your business, it’s essential to consult a knowledgeable business formation lawyer who can determine which structure is best suited for you.
Look into the different types of businesses and assess liability risks before taking any action. Structure your partnership’s governing law and create a business poised for optimum success by consulting an experienced business lawyer.
Potential Liability Arising From a General Partnership
When running a general partnership, both partners will have to pay income taxes and contend with unlimited personal liability for any debts or obligations of the business. This means that if your partner neglects to pay taxes due, you could be held personally responsible and forced to make back payments.
Unlike other types of entities, a general partnership does not provide limited liability protection for its partners. All owners are fully responsible for the business’s debts and obligations; if your partner makes an error or misstep, you may also be held accountable in court.
As a partner in a general partnership, you are accountable for any incident, from court rulings to tax blunders. If someone suffers damages from your associate’s misguided behavior, the business will be held liable. Both of you will bear equal responsibility for any damages a court may award.
If your partner mishandles money or property received for the business, it could put you and the partnership at risk for legal liability. To protect yourself from such a scenario, consider restructuring your business to shield yourself from personal responsibility. Making this switch now can save you from future headaches down the road!
Limited Liability Partnerships
As you have unlimited liability for your partner’s missteps in a general partnership, it is wise to consider alternative business structures, such as an LLC or LLP, which limit your risk exposure.
A Limited Liability Partnership structure offers partners a unique advantage as they are not individually liable for the debts and obligations of the limited partnership itself. This means that even if a partner manages or controls the business, their personal assets will remain safe from any liabilities incurred by the company.
Knowing the hazards associated with a general partnership, many entrepreneurs establish a limited liability business structure instead of a general partnership. Some of the popular types of limited liability partnerships in North Carolina include:
- Limited Liability Partnerships: With this structure, you still face unlimited personal liability for the general business’ debts and problems. However, if your partner acts with professional malpractice, you can only lose up to the total amount of your capital contributions.
- Limited Partnerships: “General” partners have unlimited personal liability for the general obligations of the limited liability partnership. However, each general partner’s liability for the professional malpractice of another partner only includes up to the amount of their capital contribution. The liability of “limited partners” only includes up to the amount of their capital contribution.
- Limited Liability Limited Partnerships: “General” partners have unlimited personal liability for the general obligations of the limited liability partnership. However, each “general” partner’s liability for the professional malpractice of another partner is limited to their capital contribution. (The liability of “limited” partners is limited to their capital contributions.) (1)
Reap the rewards of a limited liability organizational structure by shielding yourself from personal accountability for your partner’s blunders. Your maximum financial loss is only what you’ve already invested in the business -your capital contributions.
Talking with a business attorney can help you and a partner decide the best partnership or limited liability structure for your business.
We Can Help
Let our experienced business formation attorneys at Hopler, Wilms, and Hanna assist you in making the crucial decisions to start your business. We can help you create an operating agreement for your business partnership or work through disagreements between yourself and your partner.
Our professional business attorneys can also help structure partnerships or limited liability companies so that both you and your partner have the opportunity to succeed.
Contact our team today for a consultation so we can discuss how to help your business thrive as you start your venture in North Carolina!