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LEGAL DICTIONARY

Partnership

What Is a Partnership?

A partnership refers to a legal relationship between two or more people who are jointly identified in a business contract as principals.

Partnership Agreements, also called 50/50 Partnership Agreements, specify each party's responsibilities within the company.

Additionally, partnership contracts may serve as a roadmap detailing the contributions, obligations, and other partner duties.

Although drafting a written contract is advised, partnerships created without one are nonetheless subject to state law. The Uniform Partnership Act, which outlines minimal standards, has been adopted by most states.

Besides being enforceable in court, a Partnership Agreement can cover issues and procedures not addressed by state partnership legislation.

Partnership Agreements should not be mistaken for Joint Ventures. Both require multiple parties to come together to conduct business or work on a project.

However, partnerships are formed by individuals and oriented toward the long-term collaboration of their members, whereas Joint Ventures are typically made up of companies that unite for a definite period to achieve a specific goal.

Types of Partnerships

The different types of Partnership available can influence tax decisions in various ways. Partners might need to establish certain rules and regulations before the agreement can be fulfilled.

There are 3 types of Partnerships:

  • General Partnership Agreements. Employed to establish a contract between 2 or more business owners who do not wish to take the form of a corporation or a Limited Liability Company (LLC).
  • Small business Partnership Agreements. Ensures that the essential details of small businesses are clearly stated and can be legally enforced without requiring formal state registration.
  • Limited Partnership Agreements. With this type, one or more partners are granted protection from debt liability. Not to be confused with a Limited Liability Partnership (LLP), where all members get the same limited liability protection.

What’s the Difference Between a Partnership and a Business Relationship?

It is important to distinguish between business relationships and partnerships.

In business relationships, one party will look for another to meet an immediate necessity. Contrarily, partnerships entail long-term ties where each party helps the other achieve their business goals.

Start a Partnership Agreement Now

Essential Terms in a Partnership

Every corporate document and contract needs to reflect the particular circumstances of a business's activity. Although more clauses can be added to meet individual requirements, all properly structured Partnership Agreements must contain the following essential terms:

Partnership Name and Address

The name of the partnership business as it appears in state databases must be mentioned in the agreement, together with any Doing Business As names. This section will also provide the mailing address of the Partnership's main office and contact details.

Length of the Partnership Agreement

The agreement must specify how the partnership will be scaled back or terminated. Some partnerships may be planned to cease after a certain number of years or once a specific objective is met.

This section may also include clauses describing how to acquire a partner's share and any potential debt incurred by a departing party. It is also important to include directives in case one of the partners dies.

Definition of Partnership Roles

Business choices can be contentious regardless of the Partnership Agreement type. Each partner's obligations should be defined in detail to avoid any potential conflict. It must be made clear in the agreement's terms who has decision-making authority and under what conditions.

Authority of the Partners

In most circumstances, each general partner has the legal capacity to act in the best interest of the partnership. Should any of the parties want to include any restrictions or specifics, they should list them in this clause.

Investments and Ownership in the Partnership

Includes a detailed statement of each partner's financial contribution to the business and the percentage of the company that each owns. This section can also establish the frequency, size, and timing of any further or future contributions.

Conflict Resolution in the Partnership

There are various methods for resolving partner disputes. If partners are unable to reach an agreement on their own, they can always resort to mediation, arbitration, or court.

By defining a conflict resolution mechanism in advance, all parties are properly informed of their rights from the beginning.

Partnership Protocols in Case of Emergency

Unforeseen incidents can occur anytime. For example, a partner may be forced to retire and sell his share of the partnership as a consequence of financial problems. The creation of protocols can assist in dealing with challenging circumstances.

Having an action plan provides partners with a roadmap of how to react in certain situations and removes part of the stress.

Partnerships and Taxes

Partnerships are not required to pay income tax. The partners assume the tax obligation, as they are not regarded as employees for taxation purposes.

Although there is no official federal law that defines partnerships, the Internal Revenue Code (Chapter 1, Subchapter K) contains comprehensive guidelines on how they are taxed at federal level.

The tax treatment of individuals in Partnership Agreements may be more advantageous than if they had established a corporation.

Dividends and company profits distributed to owners or shareholders are subject to taxation. Likewise, profits from partnerships are not subject to this form of double taxation.

Partnerships are assigned a federal tax identification number (FEIN). However, if the partners wish to be taxed as a corporation, they can apply for an employer identification number (EIN). Aside from this, there is no relevant difference between a FEIN versus an EIN.

Helpful Resources:

Cornell Law - Revised Uniform Partnership Act of 1997 (RUPA)

US Code - 26 USC Subtitle A, CHAPTER 1, Subchapter K

What Is a Partnership?

A partnership refers to a legal relationship between two or more people who are jointly identified in a business contract as principals.

Partnership Agreements, also called 50/50 Partnership Agreements, specify each party's responsibilities within the company.

Additionally, partnership contracts may serve as a roadmap detailing the contributions, obligations, and other partner duties.

Although drafting a written contract is advised, partnerships created without one are nonetheless subject to state law. The Uniform Partnership Act, which outlines minimal standards, has been adopted by most states.

Besides being enforceable in court, a Partnership Agreement can cover issues and procedures not addressed by state partnership legislation.

Partnership Agreements should not be mistaken for Joint Ventures. Both require multiple parties to come together to conduct business or work on a project.

However, partnerships are formed by individuals and oriented toward the long-term collaboration of their members, whereas Joint Ventures are typically made up of companies that unite for a definite period to achieve a specific goal.

Types of Partnerships

The different types of Partnership available can influence tax decisions in various ways. Partners might need to establish certain rules and regulations before the agreement can be fulfilled.

There are 3 types of Partnerships:

  • General Partnership Agreements. Employed to establish a contract between 2 or more business owners who do not wish to take the form of a corporation or a Limited Liability Company (LLC).
  • Small business Partnership Agreements. Ensures that the essential details of small businesses are clearly stated and can be legally enforced without requiring formal state registration.
  • Limited Partnership Agreements. With this type, one or more partners are granted protection from debt liability. Not to be confused with a Limited Liability Partnership (LLP), where all members get the same limited liability protection.

What’s the Difference Between a Partnership and a Business Relationship?

It is important to distinguish between business relationships and partnerships.

In business relationships, one party will look for another to meet an immediate necessity. Contrarily, partnerships entail long-term ties where each party helps the other achieve their business goals.

Start a Partnership Agreement Now

Essential Terms in a Partnership

Every corporate document and contract needs to reflect the particular circumstances of a business's activity. Although more clauses can be added to meet individual requirements, all properly structured Partnership Agreements must contain the following essential terms:

Partnership Name and Address

The name of the partnership business as it appears in state databases must be mentioned in the agreement, together with any Doing Business As names. This section will also provide the mailing address of the Partnership's main office and contact details.

Length of the Partnership Agreement

The agreement must specify how the partnership will be scaled back or terminated. Some partnerships may be planned to cease after a certain number of years or once a specific objective is met.

This section may also include clauses describing how to acquire a partner's share and any potential debt incurred by a departing party. It is also important to include directives in case one of the partners dies.

Definition of Partnership Roles

Business choices can be contentious regardless of the Partnership Agreement type. Each partner's obligations should be defined in detail to avoid any potential conflict. It must be made clear in the agreement's terms who has decision-making authority and under what conditions.

Authority of the Partners

In most circumstances, each general partner has the legal capacity to act in the best interest of the partnership. Should any of the parties want to include any restrictions or specifics, they should list them in this clause.

Investments and Ownership in the Partnership

Includes a detailed statement of each partner's financial contribution to the business and the percentage of the company that each owns. This section can also establish the frequency, size, and timing of any further or future contributions.

Conflict Resolution in the Partnership

There are various methods for resolving partner disputes. If partners are unable to reach an agreement on their own, they can always resort to mediation, arbitration, or court.

By defining a conflict resolution mechanism in advance, all parties are properly informed of their rights from the beginning.

Partnership Protocols in Case of Emergency

Unforeseen incidents can occur anytime. For example, a partner may be forced to retire and sell his share of the partnership as a consequence of financial problems. The creation of protocols can assist in dealing with challenging circumstances.

Having an action plan provides partners with a roadmap of how to react in certain situations and removes part of the stress.

Partnerships and Taxes

Partnerships are not required to pay income tax. The partners assume the tax obligation, as they are not regarded as employees for taxation purposes.

Although there is no official federal law that defines partnerships, the Internal Revenue Code (Chapter 1, Subchapter K) contains comprehensive guidelines on how they are taxed at federal level.

The tax treatment of individuals in Partnership Agreements may be more advantageous than if they had established a corporation.

Dividends and company profits distributed to owners or shareholders are subject to taxation. Likewise, profits from partnerships are not subject to this form of double taxation.

Partnerships are assigned a federal tax identification number (FEIN). However, if the partners wish to be taxed as a corporation, they can apply for an employer identification number (EIN). Aside from this, there is no relevant difference between a FEIN versus an EIN.

Helpful Resources:

Cornell Law - Revised Uniform Partnership Act of 1997 (RUPA)

US Code - 26 USC Subtitle A, CHAPTER 1, Subchapter K