Embarking on a business partnership is a thrilling venture, and it’s important to make the right choices at the outset to protect your interests and set yourself up for success.
One of the biggest choices you’ll make is the structure of your business partnership. To help you along in this process, we’ll describe the key elements of forming a business partnership, the various types you can choose from, and how to make the right choice.
What is a Business Partnership, and Why Do You Need Legal Counsel for Business Partnership Formation?
Simply defined, a business partnership is a professional agreement between two or more people to collaboratively operate a business, sharing in its responsibilities, liabilities, and profits (to varying degrees, as we’ll explain).
The guidance of an experienced business partnership formation lawyer mitigates risk and minimizes potential conflict, helping you establish a solid foundation for your enterprise.
A business partnership attorney provides numerous services to clients. They advise individuals considering a partnership, identify the right business structure for an endeavor, draft partnership agreements, and help mitigate and resolve disputes if they arise.
Their legal knowledge can also help you ensure that you comply with all regulations, which can vary by state and industry.
Choosing the Right Type of Partnership for Your Business
The type of partnership you and your soon-to-be partner choose sets the foundation for a successful business relationship. There are four main types of partnerships.
1. General Partnerships
General partnerships (GPs) are the simplest type of business partnership, and establishing them is similarly straightforward; all partners must do is sign a partnership agreement, with no need to create a business entity in cooperation with the state.
General partnerships are defined by these key features:
- Partners have the agency to enter their business into loans and contracts.
- Partners typically divide business ownership and profits equally (but this depends on the specifics of their partnership agreement).
- Every partner possesses total legal liability, making them responsible for legal obligations and debts associated with the business.
Just as establishing general partnerships is a straightforward process, ending them is also relatively simple. If a partner goes bankrupt or dies, this will usually mean that the general partnership dissolves.
2. Limited Partnerships
Limited partnerships (or LPs) are business structures with two types of partners—at least one general partner and one limited partner.
- General partner: The general partner is completely responsible for managing the business and has unlimited personal liability for business debts.
- Limited partner: Limited partners invest in the business by contributing capital (i.e., cash and assets), but they have no management role, and their liability is limited to their investments.
LPs offer a flexible structure that combines the expertise of active managers (general partners) with the financial support of passive investors (limited partners). For limited partners, the benefit of these kinds of business structures is clear: they can enjoy profits from the business, but their losses can’t exceed their investments.
2. Limited Partnerships
Limited partnerships (or LPs) are business structures with two types of partners—at least one general partner and one limited partner.
- General partner: The general partner is completely responsible for managing the business and has unlimited personal liability for business debts.
- Limited partner: Limited partners invest in the business by contributing capital (i.e., cash and assets), but they have no management role, and their liability is limited to their investments.
LPs offer a flexible structure that combines the expertise of active managers (general partners) with the financial support of passive investors (limited partners). For limited partners, the benefit of these kinds of business structures is clear: they can enjoy profits from the business, but their losses can’t exceed their investments.
3. Limited Liability Partnerships
Limited Liability Partnerships (LLPs) are business structures that combine partnership flexibility and limited liability protection.
Like in general partnerships, with LLPs, all partners are involved in business management, but there’s a key benefit: LLPs shield partners from personal liability for the firm’s debts and the actions of other partners. This means that, although each partner is responsible for their own business conduct, they’re not liable for mistakes made by their partners.
LLPs are especially common in professional service sectors like law and accounting.
4. Limited Liability Limited Partnerships
A Limited Liability Limited Partnership (LLLP) is a more recent, “hybrid” type of business structure in which general partners maintain management control (like in an LP) while benefiting from limited liability protection. This means they are shielded from personal responsibility for any business debts that may arise.
Limited partners also retain their status as passive investors, and their liability is limited to their capital contributions. In other words, all partners in an LLLP are protected from liability.
Note that not all U.S. states recognize LLLPs, so this isn’t an ideal partnership structure for businesses that operate across more than one state.
4. Limited Liability Limited Partnerships
A Limited Liability Limited Partnership (LLLP) is a more recent, “hybrid” type of business structure in which general partners maintain management control (like in an LP) while benefiting from limited liability protection. This means they are shielded from personal responsibility for any business debts that may arise.
Limited partners also retain their status as passive investors, and their liability is limited to their capital contributions. In other words, all partners in an LLLP are protected from liability.
Note that not all U.S. states recognize LLLPs, so this isn’t an ideal partnership structure for businesses that operate across more than one state.
The Benefits of Each Style of Business Partnership
Choosing the right business partnership model is an important part of setting your business up for success. Each one has benefits that you should carefully consider.
General partnerships
Offers the benefit of simplicity, making it especially easy to form a business partnership, and entails shared personal liability among all partners.
Limited partnerships
Distributes management and liability between general and limited partners, which can be beneficial for businesses seeking external investment. Limited partners can contribute capital without taking on excess liability or an active managerial role.
Limited liability partnerships
Shields all partners from personal liability, making them an especially useful structure for professional services firms. Partners can enjoy the flexibility of a partnership structure while shielding themselves from personal liability for their colleagues’ actions.
Limited liability limited partnerships
Combines limited liability with managerial control. They are an ideal choice for ventures where partners desire active management involvement as well as protection against individual financial risk, but they’re not recognized in all states.
Assess your business goals and risk tolerance before making a final decision. For instance, if simplicity is a priority, a general partnership might suffice, but if you’re seeking comprehensive protection against personal liability and shared obligations, an LLP or LLLP might be more suitable.
What to Include in Your Business Agreement
If you’ve determined the right partnership structure to pursue, don’t just sign (or have your partner sign) on the dotted line. Many elements must be included in a business partnership agreement in order for it to provide the intended protection.
Ownership percentage
Ownership percentage refers to how much each partner will contribute in cash, equipment, services, property, etc. These individual contributions usually determine each partner’s percentage of ownership.
Ownership percentage
Ownership percentage refers to how much each partner will contribute in cash, equipment, services, property, etc. These individual contributions usually determine each partner’s percentage of ownership.
Profit and loss distribution
This distribution can be based on each partner’s percentage of ownership, or it can be equal between all partners.
Approach to decisions and dispute resolution
Business partnerships require making joint decisions, which means there is always room for differing opinions. Planning ahead can mitigate the risks of disagreements by specifying procedures to maintain checks and balances.
Your partnership agreement should also include your approach to dispute resolution, such as a mediation clause that can help resolve disputes without your having to take the disagreement to court.
Approach to decisions and dispute resolution
Business partnerships require making joint decisions, which means there is always room for differing opinions. Planning ahead can mitigate the risks of disagreements by specifying procedures to maintain checks and balances.
Your partnership agreement should also include your approach to dispute resolution, such as a mediation clause that can help resolve disputes without your having to take the disagreement to court.
Partnership duration
Many partnerships do not require a duration to be specified. However, depending on the nature of your partnership, you may choose to identify the time at which your partnership will expire.
Similarly, you may add clauses that allow for an extension of the partnership depending on certain factors. Your attorney can advise you on the right contractual approach for your goals.
Procedures for ending the partnership
There should be terms in your agreement for handling a dissolution of the partnership or a partner’s withdrawal from the partnership. For instance, you might specify a buy-and-sell arrangement for valuation or require partners to have life insurance policies for which the other partners are beneficiaries.
Procedures for ending the partnership
There should be terms in your agreement for handling a dissolution of the partnership or a partner’s withdrawal from the partnership. For instance, you might specify a buy-and-sell arrangement for valuation or require partners to have life insurance policies for which the other partners are beneficiaries.
Work with an Experienced New Jersey Business Partnership Lawyer
Seeking expert guidance in forming your own business partnership? Reach out to The Law Offices of Andrew Dressel LLC for client-centric law services with a tailored approach.
Our talented New Jersey legal team specializes in guiding clients through the process of crafting effective business partnership formations, with a track record of facilitating successful collaborations across diverse industries.
Contact The Law Offices of Andrew Dressel LLC today to schedule a free virtual consultation and learn more about how our team’s forward-thinking, solution-oriented approach can help you establish a robust business partnership.
The content in this article is for general informational purposes only. It should not be construed as legal advice or a substitute for legal advice. The information above does not create an attorney-client relationship, nor do prior results guarantee future outcomes. Any reliance you place on such information is therefore strictly at your own risk.