Various Type Of Organization Structure

A business may be carried on in any one of the following form:

1. Sole proprietorship (Part 1 of 3)
2. Partnership
3. Limited Company
CHARACTERISTIC OF A PARTNERSHIP:
1. A partnership is not a legal entity such that the partnership has to sue or be sued in the names of the
partners;
2. The liability of each partner is unlimited;
3. A partnership must comprise of at least two members. The maximum number allowed is twenty;
4. Partnerships are governed by the relevant Partnership Act. If the partners do not make their own
agreement, or if their own agreement does not cover any particular matter specified in the Partnership
Act, provisions of the Partnership Act dealing with that particular matter will become applicable.
Advantages of a Partnerhip:
1.
2.
3.
4.
5.
6.
7.

Like the Sole proprietorship, disclosure of financial statements to the general public are not required;
Easy to form compared to a limited company;
higher capital is available compared to a sole proprietorship;
taking advantage of the different expertise and skill of the different partners;
low cost of formation;
Tax advantage;
partnerships not subjected to many regulations compared to limited companies

Disadvantages of a Partnership:
1. Lack of flexibility unlike the one-man show of a sole proprietorship;
2. Still cannot avoid the unlimited liability like the sole proprietorship;
3. Limited life when one of the partners withdraws or dies, then the partnership will dissolve by itself;
4. Conflicts amongst the partners might affect the stability of the partnership;
5. Capital though higher than a sole proprietorship but still limited compared to a limited company.
Salient Points to note:
The general practice is to have some form of agreement between the partners setting out their rights,
duties and liabilities. This agreement is referred as the Partnership Deed.

The normal clauses in a Partnership Deed includes the following:

Names of the partners and firms name;
Nature of the business;
Term of the partnership;
Capital to be introduced by each partner;
Profit and loss sharing ratios;
Arrangements as to partners drawings and salaries;
Arrangements regarding interest on capital, advances and drawings;
Provisions regarding the retirement or death of a partner;
Method of valuing goodwill upon retirement or death of a partner and
Other details to be observed by partners.

Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual
interests.
Since humans are social beings, partnerships between individuals, businesses, interest-based
organizations, schools, governments, and varied combinations thereof, have always been and
remain commonplace. In the most frequently associated instance of the term, a partnership is
formed between one or more businesses in which partners (owners) co-labor to achieve and
share profits and losses (see business partners). Partnerships are also common regardless of and
among sectors. Non-profit, religious, and political organizations, may partner together to increase
the likelihood of each achieving their mission and to amplify their reach. In what is usually called
an alliance, governments may partner to achieve their national interests, sometimes against
allied governments who hold contrary interests, such as occurred during World War II and the
Cold War. In education, accrediting agencies increasingly evaluate schools by the level and
quality of their partnerships with other schools and a variety of other entities across societal
sectors. Partnerships also occur at personal levels, such as when two or more individuals agree
to domicile together, while other partnerships are not only personal but private, known only to
the involved parties.
Partnerships present the involved parties with special challenges that must be navigated unto
agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority
and succession, how success is evaluated and distributed, and often a variety of other factors
must all be negotiated. Once agreement is reached, the partnership is typically enforceable by
civil law, especially if well documented. Partners who wish to make their agreement affirmatively
explicit and enforceable typically draw up Articles of Partnership. It is common for information
about formally partnered entities to be made public, such as through a press release, a
newspaper ad, or public records laws.
While partnerships stand to amplify mutual interests and success, some are considered ethically
problematic. When a politician, for example, partners with a corporation to advance the
corporation's interest in exchange for some benefit, a conflict of interest results. Outcomes for
the public good may suffer. While technically legal in some jurisdictions, such practice is broadly
viewed negatively or as corruption.
Governmentally recognized partnerships may enjoy special benefits in tax policies. Among
developed countries, for example, business partnerships are often favored over corporations in
taxation policy, since dividend taxes only occur on profits before they are distributed to the
partners. However, depending on the partnership structure and the jurisdiction in which it
operates, owners of a partnership may be exposed to greater personal liability than they would
as shareholders of a corporation. In such countries, partnerships are often regulated via anti-trust
laws, so as to inhibit monopolistic practices and foster free market competition. Enforcement of
the laws, however, is often widely variable. Domestic partnerships recognized by governments
typically enjoy tax benefits, as well.
Definition in civil law

A partnership is a nominate contract between individuals who, in a spirit of cooperation, agree to

carry on an enterprise; contribute to it by combining property, knowledge or activities; and share
its profit. Partners may have a partnership agreement, or declaration of partnership and in some
jurisdictions such agreements may be registered and available for public inspection. In many
countries, a partnership is also considered to be a legal entity, although different legal systems
reach different conclusions on this point.
Germany
Kommanditgesellschaft
Partnerships may be formed in forms of the General Partnership (Offene Handelsgesellschaft,
OHG) or Limited Partnership (Kommanditgesellschaft, KG). A partnership can be formed by only
one person. In the OHG, all partners are fully liable for the partnership's debts, whereas in the KG
there are general partners with unlimited liability and limited partners whose liability is restricted
to their fixed contributions to the partnership. Although a partnership itself is not a legal entity, it
may acquire rights and incur liabilities, acquire title to real estate and sue or be sued
China
Partnership (China)
In mainland China, a partnership enterprise encompasses two types of partnerships general
partnerships and limited partnerships. A general partnership comprises general partners who
bear joint and several liabilities for the debts of the partnership enterprise. There is a special
general partnership which can be employed by professional service providers such as accountant
firms and law firms. A limited partnership enterprise includes general partners and limited
partners where the limited partners are liable only to the extent of their capital contributions.
Japan
The Japanese civil code provides for partnerships by contract, which are commonly known as
nin'i kumiai ( ) or "voluntary partnerships." A more recent statute has allowed for the
creation of limited liability partnerships.
One form of partnership unique to Japan is the tokumei kumiai or "anonymous partnership," in
which partners have limited liability so long as they remain anonymous in their capacity as
partners and do not participate in the operation of the partnership. Japan provides for
partnership-like corporations called mochibun kaisha.
Netherlands
Accountants in the Netherlands organized themselves for the first time as partnerships in 1890
when two single proprietorships bundled their efforts to form a partnership. The event was
followed by numerous other events, including additional consolidation and entrepreneurship,
mergers and acquisitions, internationalization regulatory and economic discontinuities that
changed the sector dramatically. Partnerships differ from private and public corporations in that
all partners are fully responsible for decisions made by any of the partners. A historical and
organizational study of accounting partnerships in The Netherlands over the period 1890-1990
showed that partnerships benefit greatly from supplementing partners with associates ( the ratio
of partners to associates refers to "leverage' and greatly impacts the partnerships survival odds,
but only partners as so called residual claimants are liable for the conduct and performance of
the partnership as firm). Also the heterogeneity of the partners as a group of professionals
benefits from compositional effects such as homogeneity in experience and other demographic
characteristics.

Common law
Under common law legal systems, the basic form of partnership is a general partnership, in
which all partners manage the business and are personally liable for its debts. Two other forms
which have developed in most countries are the limited partnership (LP), in which certain limited
partners relinquish their ability to manage the business in exchange for limited liability for the
partnership's debts, and the limited liability partnership (LLP), in which all partners have some
degree of limited liability.
There are two types of partners. General partners have an obligation of strict liability to third
parties injured by the Partnership. General partners may have joint liability or joint and several
liability depending upon circumstances. The liability of limited partners is limited to their
investment in the partnership.
A silent partner is one who still shares in the profits and losses of the business, but who is
uninvolved in its management, and/or whose association with the business is not publicly known;
these partners usually provide capital.
Hong Kong
Partnership (Hong Kong)
A partnership in Hong Kong is a business entity formed by the Hong Kong Partnerships
Ordinance, which defines a partnership as "the relation between persons carrying on a business
in common with a view of profit" and is not a joint stock company or an incorporated company. If
the business entity registers with the Registrar of Companies it takes the form of a limited
partnership defined in the Limited Partnerships Ordinance. However, if this business entity fails
to register with the Registrar of Companies, then it becomes a general partnership as a default.
Australia
Partnership (Australia)
Summarising s. 5 of the Partnership Act 1958 (Vic) (hereinafter the "Act"), for a partnership in
Australia to exist, four main criteria must be satisfied. They are:
Valid Agreement between the parties;
To carry on a business this is defined in s. 3 as "any trade, occupation or profession";
In Common meaning there must be some mutuality of rights, interests and obligations;
View to Profit thus charitable organizations cannot be partnerships (charities are typically
incorporated associations under Associations Incorporations Act 1981 (Vic))
Partners share profits and losses. A partnership is basically a settlement between two or more
groups or firms in which profit and loss are equally divided
United Kingdom limited partnership
Main articles: UK partnership law and Limited Partnership Act 1907
A limited partnership in the United Kingdom consists of:
One- twenty people (except in solicitors and banks) called general partners, who are liable for all
debts and obligations of the firm; and
One or more people called limited partners, who contribute a sum/sums of money as capital, or
property valued at a stated amount. Limited partners are not liable for the debts and obligations
of the firm beyond the amount contributed.
Limited partners may not:
Draw out or receive back any part of their contributions to the partnership during its lifetime; or

Take part in the management of the business or have power to bind the firm.
If they do, they become liable for all the debts and obligations of the firm up to the amount
drawn out or received back or incurred while taking part in the management, as the case
may be.
India and Pakistan
According to section 4 of the Partnership Act of 1932, which applies in both India and Pakistan,
"Partnership is defined as the relation between two or more persons who have agreed to share
the profits and losses according to their ratio of business run by all or any one of them acting for
all". This definition superseded the previous definition given in section 239 of Indian Contract Act
1872 as Partnership is the relation which subsists between persons who have agreed to
combine their property, labour, skill in some business, and to share the profits thereof between
them. The 1932 definition added the concept of mutual agency.
A partnership firm is not a legal entity apart from the partners constituting it. It has limited
identity for the purpose of tax law as per section 4 of the Partnership Act of 1932.
USA
Partnership taxation in the United States
The federal government of the United States does not have specific statutory law governing the
establishment of partnerships. Instead, each of the fifty states as well as the District of
Columbia has its own statutes and common law that govern partnerships. These states
largely follow general common law principles of partnerships whether a general
partnership, a limited partnership or a limited liability partnership. In the absence of
applicable federal law, the National Conference of Commissioners on Uniform State Laws
has issued non-binding models laws (called uniform act) in which to encourage the
adoption of uniformity of partnership law into the states by their respective legislatures.
This includes the Uniform Partnership Act and the Uniform Limited Partnership Act.
Although the federal government does not have specific statutory law for establishing
partnerships, it has an extensive and hyperdetailed statutory scheme for the taxation of
partnerships in the Internal Revenue Code. The IRC is Title 26 of the United States Code
wherein Subchapter K of Chapter 1 creates tax consequences of such great scale and
scope that it effectively serves as a federal statutory scheme for governing partnerships.
Islamic Law
Qirad
The Qirad and Mudarabas institutions in Islamic law and economic jurisprudence were the
precursors to the modern limited partnership . These were developed in the medieval Islamic
world, when Islamic economics flourished and when early TRADING COMPANIES, big businesses,
contracts, bills of exchange and long-distance international trade were established.
In medieval Italy, a business organization known as the commenda appeared in the 10th century.
As an institution, the commenda is very identical to the qirad but whether the qirad transformed
into the commenda, or the two institutions evolved independently cannot be stated with
certainty.

Read more: http://www.referenceforbusiness.com/knowledge/Partnership.html#ixzz3WEBPoC00

How to Structure a Partnership

Partnerships are incredibly common--and incredibly hard to sustain. Here's how to set up a
partnership that is equitable, efficient, and mutually rewarding.
When two or more people start a business or carry on a trade together to turn a profit, the result
can often be a strong union that blends complementary skills, financial resources, customers and
connections to help the venture succeed. But, sometimes, such relationships can sour, the
business can fail, and the parties can decide to go their separate ways. In the eyes of the law, by
the very nature of entering into business with another party, you may be considered a
partnership -- whether you have a written agreement or not. It's best to follow certain legal and
practical steps to structure this relationship so that it is a win-win for all concerned.
The number of business partnerships in the U.S. has been growing steadily by an annual rate of
about 5.6 percent a year to more than 3 million in 2007, according to the most recent records
reported by the U.S. Internal Revenue Service. The total net income for these partnerships has
also been on the rise, increasing by 2.5 percent from 2006 to a total $683 billion for 2007, IRS
figures show.
With that much money at stake, it's important for partnerships to spell out what each person
contributes, whether in terms of financing, property, labor or customers, and what each person
expects in terms of profits and ownership. A partnership agreement can be solidified by an oral
agreement between partners, but experts recommend putting the terms down in writing.
"I liken the partnership agreement to a prenup negotiated before a marriage," says Barbara
Weltman, a tax and business attorney and author of such books as J.K. Lasser's Small Business
Taxes (Wiley 2009). "When everybody loves each other and has the best of intentions, it's a good
idea to work out the 'what ifs.' You want to decide in advance who is getting what, who is doing

what, who is responsible for what, and how to resolve disagreements -- what happens if one
person wants to retire or one partner wants to expand and the other doesn't?"
The following pages will cover the benefits and disadvantages of a partnership, how to structure
a partnership in a written agreement to protect yourself and the business, and steps you need to
take in forming a partnership.

Why Form a Partnership?

Once you have an idea for a company, whether this means selling a product or a service,
understand the consequences of opting to become a partnership. As a business partner, you
need to be prepared to devote time, use business methods, and get set up properly so you can
make more money, minimize taxes, and generally avoid potential problems. Here are the pros
and cons of forming a business partnership:

Benefits of a partnership

This type of business entity is easy and inexpensive to set up. There are no formal or legal steps
required in forming a partnership, unlike forming a corporation, for which you have to file with
your state government. As long as you join with at least one other person and have the intention
of making a profit from your business, you are automatically a general partnership, Weltman
says.
Filing income tax returns is easy. A general partnership is a "pass through" entity, meaning the
partners -- and not the partnership -- are taxed individually. That means that the partnership
return is merely an information return, telling the IRS about the partnership's income and
expenses; the partners pay tax on their share of partnership income on their personal returns.
It's a way to attract prospective employees or "talent." A business potentially can reach new
heights when complementary skill sets are gathered under a partnership. A partnership can also
serve as an incentive to attract new employees if they realize they may become partners at
some point.
Disadvantages of a partnership
Perhaps the biggest drawback is that each partner is jointly and severally liable for the debts and
obligations of the business. "A creditor can sue a single partner for all of the partnership debt
owed and this partner is responsible for paying the full amount to the creditor," Weltman says.
Once a partner pays off the creditor, he or she can seek "contribution" from the other partner(s).
All your personal assets are potentially at risk. This is why some attorneys, such as Cliff Ennico,
nationally syndicated small business columnist and author of Small Business Survival Guide
(Adams Media 2005), suggest that you are better off incorporating your business or forming a
limited liability company (LLC) rather than structuring it as a partnership. Incorporating can help
shield personal assets if your business is sued, or if your business partner is sued.
Any asset you contribute to the partnership is jointly owned by you and your partners, and
there's no assurance you will get it back when the partnership is dissolved.
Profits that a business makes under a partnership must be shared with others.
Unlike in a corporation, you may not be able to deduct some employee benefits from business
income on tax returns.

Any time you share decision-making responsibilities with other parties; there is the potential for
disagreements. Partners are co-owners and that means they share management and financial
control over the business.
Dig Deeper: The Pros and Cons of Business Partnerships

Structuring a Business Partnership: Who Qualifies?

The first step you need to take in forming a business partnership is to figure out who is in the
partnership. Partnerships can be formed with two or more partners, although Ennico points out
that partnerships with large numbers of partners (more than 10) can become unwieldy to
manage. Professional firms with 50 or more partners have extremely detailed agreements
spelling out rigid procedures over who gets admitted, who signs the lease, the structure of the
partnership, etc. "It can get very involved," Ennico says. Partners can include employees,
spouses, family members, or associates. There may be reasons arguing against including a
spouse as a partner; for example, if you transfer title to your personal assets into your spouse's
name to protect your personal property in the event the partnership is sued, the spouse cannot
have any involvement in the partnership business whatsoever, according to Ennico.
If you are teaming up with someone else to perform services for a mutual client (for example, a
website developer who subcontracts the design work to another consultant) and do not with to
make that person your formal business partner, make sure the other person signs an agreement
stating clearly that they are not your partner or agent. Ennico further recommends that you
notify the client in writing or by e-mail that you are NOT in partnership with that person.
Otherwise, Ennico says there's a risk the client may view you as partners and will hold both of
you accountable as such if something goes wrong.

Structuring a Business Partnership: General or Limited?

There are two types of partnerships. Which one is the right kind for you?
General partnerships are formed when two or more people agree to enter into business
together to make a profit. You don't even need to put anything in writing (although you should)
or file any type of notice with state or local authorities. The feature that distinguishes this from
other business arrangements -- and makes it a dangerous business form -- is the joint and
several liability of the partners. That means each partner is liable for any debts of the
partnership or of any partners on behalf of the business. "Try to avoid forming a partnership,"
Ennico says. "The operating agreement for a Limited Liability Company (LLC) contains almost all
the same provisions as a partnership agreement, and the cost is about the same."
Limited partnerships are a variation, in which a business partnership is comprised of at least
one general partner and one limited partner. "The limited partner gets this name because he or
she enjoyed limited personal liability," Weltman says. "The extent of exposure for partnership
debts is essentially the limited partner's investment in the partnership." The limited partner is a
silent partner, contributing money to the venture but without any right to direct how it operates
or otherwise being involved in the running of the partnership business. Also, a limited
partnership can only be formed by creating a formal agreement in accordance with state law and
filing certain documents with your state Secretary of State's office. In a handful of states, you
may also need to publish a "notice of formation" in local newspapers.
Dig Deeper: How to Choose the Right Legal Structure

Structuring a Business Partnership: Writing a Business Plan

While this exercise is not mandatory, it is extremely helpful to ensure success of a partnership.
"The plan serves as a roadmap for the partnership to implement actions necessary to start up
and grow the company," Weltman says. "It also is useful in making you focus on various aspects
of the business, such as where you plan to obtain start-up capital and whether you will be selling
through the Web." A business plan should describe the responsibilities of each partner for the
business, including who will be the head or managing partner.

Structuring a Business Partnership: Choosing a Name

Finding the right name for your business can describe what the business is all about. "Frequently,
the fact that the business is a partnership is explained by the name, such as Wang and Williams
Associates," says Weltman. "Other times, the name may relate to the product or service being
offered by the partnership." After choosing the name, you need to protect it. Do this by making
sure a suitable Internet domain name is available for your partnership, as most businesses these
days should establish a website. Even if you don't set up a website immediately, reserve the
name by registering your site. Check availability of the name you want to use through
Register.com or other domain name providers. You will also need to register your partnership
name with a local government, for which there is usually a modest fee. And while it's not
required, it's often a good idea to gain legal protection for your partnership in the form of a
trademark. Learn about trademark protection from the U.S. Patent and Trademark Office.

Structuring a Business Partnership: Understanding Your Tax Obligations

A business partnership does not pay taxes on income. The partnership is a pass-through entity
and the individual partners pay tax on their distributive share of partnership income passed
through to them. Each year, the partnership files a return, Form 1065, to report to the IRS the
income, gains, losses, deductions, and credits from the business, Weltman says. It also files a
Schedule K-1 for each partner, allocating a share of each item of income, deductions, etc.
according to the terms of the partnership agreement. Similar reporting may be required at the
state level.
Each partner reports his or her share of income on Schedule C of his or her personal income tax
Form 1040. If the partnership is profitable, each partner must pay self-employment taxes on his
or her net earnings. These taxes cover the employer and employee share of Social Security and
Medicare taxes. Because a partner is not an employee (a partner is a self-employed person),
there is no withholding from a paycheck to cover income and self-employment taxes. Instead,
these taxes are paid through quarterly estimated tax payments.
There are special rule for husband-wife ventures. If a married couple operates a venture in which
each materially participates and they file a joint return, they can opt not to file Form 1065.
Instead, they can file a single Schedule C (the form used by sole proprietors) to report their share
of business income and expenses.

Structuring a Business Partnership: Other Details

Weltman says to make sure to deal with various other business matters before your partnership
begins operations:
Obtain a federal employer identification number. A new partnership must obtain a federal
employer identification number (EIN). This can be done instantaneously and at no cost from the
IRS. When partners exit the partnership, or new partners are added, your partnership may need
to obtain a new EIN as it is considered a "new" partnership for tax purposes.

Obtain licenses and permits. Depending on your type of business, the partnership and/or each
partner may be required to have a license or permit to operate legally.
Choose a location. Decide the "official" address for the partnership. With technology enabling
partners to work from remote locations, it is helpful to designate one place to receive partnership
mail. If partners operate from their respective homes, the partnership can obtain an address
from such companies as a UPS Store or a virtual office.
Obtain insurance. Because each partner's personal assets are exposed to the claims of the
partnership's creditors, the best way to obtain protection is to carry adequate insurance for the
unexpected. Discuss these and other types of coverage with an insurance agent: property and
liability coverage, auto insurance, and health coverage.
Structuring a Business Partnership: Writing the Partnership Agreement
General partnerships can be informal, oral arrangements to share profits and losses of a business
venture. However, it is highly advisable to use a formal, written partnership agreement to spell
out how income, deductions, gains, losses, and credits are to be split. If the agreement is silent,
then state law is used to fill in gaps -- and that could leave a lot of decisions up to the courts if
you and your partner(s) have a falling out.
"Legally, you're not required to have a written partnership agreement but I think you're a fool not
to have one," Ennico says. "If you don't have a written agreement, a judge looks at the
partnership statute and that acts as your agreement."
That may be fine. But it may also not be so good, Ennico says, because the partnership laws in
many states assume that all partners are equal. "If we set up a partnership on a handshake and
agree to split the business 70-30, and we then have a falling out because you think you are
working harder than I am and deserve a bigger share of the profits, the law may say we are 5050 partners unless we can clearly document in writing, for example a signed Form 1065, our
intent to create an unequal split," Ennico says.
Laws vary by state. There are sample partnership agreements available on legal websites on the
Internet, such as Law Depot and LegalZoom. But a partnership agreement can be put in writing
by a lawyer for between $500 to $1,000 and that might very well be worth the investment to
your business, Ennico says. "Never undertake a partnership agreement without an attorney," he
says. "I once handled an agreement involving a 20-member engineering firm that consisted of 90
pages plus schedules. It took more than six months for the partners to reach agreement on all
the details."
Here are some critical elements to include in a partnership agreement:
1. Partnership information.
List the name of the partnership, location, when it was formed and the purpose of the business.
Who the partners are and their capital contributions
Determine who the partners are and list them, their addresses, and Social Security Numbers.
Then detail what the partners are putting into the partnership. These contributions may include
money, intellectual property, customers, machinery, vehicles, etc.
2. Profit and loss distribution.
Each partner's "distribution percentage" reflecting their share of partnership profits and losses
must be clearly stated in the agreement. Partners share in the profits and losses to the extent

of their share in the business. If each contributes 50 percent of the start-up money, then each is
entitled to 50 percent of the profits, according to Weltman. Ennico adds, "distributions of profit
must be made in accordance with the partners' percentages if you don't do that, there's a risk
that the partnership tax laws may rearrange your percentages to reflect how much money you
and your partners are actually taking out of the partnership checking account.
3. Rules concerning voting, admitting new partners, and management.
Determine who is going to manage the partnership, who can sign contracts, and whether
partners are going to be receiving salaries for labor or services. "Unlike distributions of profit,
salaries do not have to be made proportionately to the partners," says Ennico. "I frequently see
situations where unequal partners decide to take equal salaries for the work they're doing to
further the partnership business." You also need to determine the voting rights of the partners -normally a simple majority vote of the partners decides what happens and what doesn't, but you
can agree that important decisions be made by a "supermajority" vote of two-thirds or more of
the partnership percentages.. "For example, many partnership agreements require that the
partners be unanimous when deciding to admit new partners, merge with another company, sell
part of their business, or make a bankruptcy filing," says Ennico.
4. The exit strategy
The most important thing to spell out in a partnership agreement is your "exit strategy" if things
don't go as planned and you want to get out of the partnership. "The dirty little secret is that as
long as everybody gets along and everybody communicates and everybody does what they're
supposed to, no one will look at the partnership agreement again," Ennico says. "The only time
anyone is going to dust off the agreement and run to an attorney is when they are unhappy and
want out."
This section details how to dissolve the partnership the circumstances under which partners
can withdraw, how much notice they must provide, and how the assets will be distributed. This
section may also deal with other issues, such as what happens if one partner retires, goes
bankrupt, becomes disabled, or dies. When such events occur, the departing partner's share of a
business doesn't automatically get divided between the remaining partners. It is an asset that
may be transferred by law to someone (such as a deceased partner's heirs, or to the partner's
ex-spouse in a divorce proceeding) that you don't want to be partners with. If you don't want to
be a partner with that "someone else", you may want to insist on a buy/sell clause that specifies
that the surviving partners have the right to buy out that "someone else" in the event of a
partner's death, disability, divorce, bankruptcy or retirement. If you do this, you should specify
the method of determining the value of the departing partner's share.
Ennico says your partnership agreement should clearly state "who gets what" when the
partnership dissolves, and spell out rules for what the partners can and cannot do afterwards:
"for example, can you still talk to your old customers? Can you take your customers with you?
Are you prohibited from doing a similar business in the same geographic area as the partnership?
All these things can and should be spelled out."
5. The means of dispute resolution.
In the event that partners have disagreements, you may want to include in your partnership
agreement how those agreements will be worked out. You may want to specify that partners
bring disputes to mediation before arbitration, go to arbitration directly, or agree to only go to
arbitration.

Dig Deeper: Why Partnerships Fail

Structuring a Business Partnership: Recommended Resources
Business.gov: Link to your location to find applicable requirements.
Cliff Ennico, the small business attorney quoted in this article, has an excellent outline on the
advantages and disadvantages of forming partnerships, LLCs and corporations, entitled
"Demystifying the Business Organization," which is available without charge on his website.
Internal Revenue Service: View IRS Publication 541, Partnerships, for guidance on partnership
taxation.
U.S., Small Business Administration: How to choose a business structure.

Partnership Basics
14 SHARES

A partnership is an association of two or more persons, known as general partners, who act as coowners of a business and operate it for profit. The other two major forms of business are a sole
proprietorship and a corporation.
Since each state has specific laws on the formation and dissolution of partnerships, as well as laws
regarding the legal responsibilities of each partner, business owners are well advised to consult an
attorney and a tax accountant before establishing a partnership.
A partnership is relatively simple to establish and does not require the same amount of record
keeping as a corporation. Another advantage of a partnership is that income is taxed only once. By
contrast, most corporations are taxed twice -- they pay taxes on their income, and if there are
shareholders, they in turn pay taxes on the share of the corporation's income that they receive as
dividends.
Partnerships need only file an information return (a form indicating the partnership's income,
expenses, and profits or losses) with the Internal Revenue Service, but the partnership itself does not
pay taxes. Each partner pays federal, state, and local taxes on their income from the partnership as if
it were personal income.
The chief disadvantage of being a general partner is that you can be held personally responsible for
another partner's negligence or carelessness. This means that if your partnership is unable to meet
its financial obligations, you may have to use your personal assets to pay off debtors, even though

you personally may not be at fault. If the partnership defaults on a loan, for example, the bank has the
right to sue any general partner to collect this debt. If you own a car or a home, the court may order
you to sell that property and turn the proceeds over to the bank. (If you and your spouse own the
property jointly, the bank is entitled to only one-half the proceeds.)
Another disadvantage of a partnership is that if one partner decides to sever the business
relationship, then the partnership generally dissolves. The bankruptcy or death of a partner usually
results in the end of the partnership.
Partnership Agreement
Once you and another person have decided to form a partnership, you should prepare an agreement.
If you plan to be in business for more than one year, the agreement must be in writing. If you are
planning a short-term business venture, an oral agreement may suffice, but it is still best to put
everything down on paper to avoid potential misunderstandings and disagreements. Your partnership
agreement should include the following:

The name of the partnership and the names of each of the partners.
A general description of the type of business that will be conducted.
The powers and duties of the partners, including any limitations or restrictions.
The financial contributions each partner will make.
How profits and losses are to be divided.
How partners can leave the business and how new partners can be added.
What steps must be taken to dissolve the partnership.
Limited Partnerships
If you and another person have all the necessary business skills but insufficient capital, you might be
better served by a limited partnership -- a business made up of one or more general partners and one
or more special partners with limited liability. Unlike a general partner, who is personally responsible
for all debts and obligations of the partnership, a limited partner can lose only the amount of capital
he has invested in the business.
A limited partner has relatively little power within the partnership because he is not allowed to be
actively involved in the management of the business; he is merely a financial contributor.
Nevertheless, he has the right to be informed of all business matters relating to the company and to
share in its profits. (His profits, like those of a general partner, are treated as personal income for
federal tax purposes.) If a limited partner starts making management decisions, his status
immediately changes to general partner, and he becomes personally responsible for any business
debts.
Ending a Partnership

After a partnership is dissolved, the partners are no longer authorized to conduct business together.
To formally end the partnership, they must discharge all business obligations to creditors and divide
all assets and any remaining profits among themselves.
Source: Reader's Digest's Legal Problem Solver: A Quick-and-Easy Action Guide to the Law,
1994, updated 1998