BusinessHABWeathervane seafood restaurant: In most cases, the best structure for a partnership is the limited liability company (LLC).
I realize there are unique situations where a corporation or a limited partnership might make sense.
However, those are the exception and not the rule. In fact, if you need to save taxes.
It’s typical to have each member’s share of the LLC owned by an S corporation.
There are three significant reasons why the LLC is such a perfect entity for partnerships.
Alone we can do so little; together we can do so much. You can request publication of your article for publication by sending it to us via our Email below. businesshabblog@gmail.com or SMS/WhatsApp) or call +2347034920650. Click here to start business now with businesshab.com
businesshabblog@gmail.com
Weathervane seafood restaurant
Here’s a brief summary:
1. Its limited liability protection shields you from the acts of your partner (and vice versa). Without it, you have unlimited vicarious liability.
2. The operating agreement and corresponding initial minutes and formation documents are fantastic documents to define all of the partnership terms.
3. The flexibility of the LLC is beneficial for allocating profits, losses, and capital.
As well as allowing individual partners to do their own tax planning after they receive their allocated share of profit.
Creating the partnership agreement and setting up the proper entity/structure for the partnership are the two most important steps in the partnership process.
Understanding the mechanics of how your business will be managed is the key to designing your partnership agreement and documenting the terms.
While the list of items to consider in a solid partnership agreement is indefinable—every partnership is different—I’ve narrowed it down to best tips on LL C Partnership.
Weathervane seafood restaurant
1. Communication and documentation.
As the business partnership evolves, record and document anything that’s contrary to your initial partnership/operating agreement.
A good partnership/operating agreement will allow for revisions due to changing circumstances.
But these should always be in writing and signed by each business partner.
2. Register your partnership.
If you are using the LP or LLP structures, you will be required to register your partnership with your state government.
Although GPs are usually not required to register with the state government (beyond registering the name).
A few types of businesses (think alcohol, tobacco, and firearms) are required to register with the federal government.
- It would be extremely unusual for a business required to register with the federal government to be organized as a GP.
- A comprehensive list of businesses that must register with the federal government can be found at: https://www.sba.gov/content/what-federal-licenses-and-permits-does-your-business-need
Weathervane seafood restaurant
3. Be involved in your business.
Don’t ever think a partnership is a turnkey operation.
People who aren’t in constant communication with their partners will soon find themselves on the outside and in a dispute.
Clearly understand your duties and responsibilities, and fulfill the expectations of your partners or readdress what those expectations should be.
4. Bookkeeping and tax deposits.
Don’t cut corners on bookkeeping and finances.
This is the lifeblood of your business and will determine when and how your profits are distributed.
Making sure your tax deposits are made on time and in the right amounts is also the backbone of good tax planning in your partnership.
Beware of “phantom income,” which is income from the partnership that exists on paper but has no corresponding distributions.
This can wreak havoc on a partner’s individual tax return without proper bookkeeping and planning.
Weathervane seafood restaurant
5. Write up a partnership agreement.
If you partner up as an LP or LLP, you’ll be legally required to do this.
Even if you’re partnering up as a general partnership (GP).
It’s best to have the terms and conditions of your venture in writing.
There is a fantastic article covering the details of writing up an agreement here:
Write a Partnership Agreement, but the basics of what to cover are straightforward.
- Make sure that your partnership agreement enumerates the initial financial contributions of each partner.
- How profits will be distributed, and who is responsible for the various managerial roles.
- A good partnership agreement will cover what happens to the partnership going forward
6. Partner roles in signing and authorizations.
Have a very clear understanding of what the managers or officers of the business are authorized to do on behalf of the company.
Weathervane seafood restaurant
7. Duties and responsibilities of each partner.
There should be a description of each partner’s responsibilities and duties so each partner knows what to expect from the other.
Furthermore, there should be predetermined consequences for partners not completing their duties.
8. Contributions of capital.
What amount of time, money, and assets is each partner contributing to the partnership?
This includes the initial contributions as well as additional contributions that may be necessary to continue operating the business in the future.
9. Rights to distributions, profits, compensation, and losses.
Any right of the partners to receive discretionary or mandatory distributions.
Which includes a return of any or all of their contributions.
Needs to be clearly and specifically set forth in the partnership agreement.
Weathervane seafood restaurant
10. Unanimous vote requirements.
Which events or decisions will require a unanimous vote of the business partners?
It’s crucial that you and your business partners decide the procedure together from the outset.
11. Make sure all the partners know what the other partners are expecting.
You will want to discuss the roles and responsibilities of each partner prior to writing up the partnership agreement, and certainly prior to going into business.
You need to know what your partners expect from you, and they need to know what you expect from them.
Make sure that the reasons they want to form the partnership are compatible with the reasons you want to form the partnership.
- While you don’t need to iron out every detail, make sure that you and your partners also go over your initial business strategy before you take the plunge.
- Starting a new enterprise is always difficult, there’s no need to add a major conflict about management and strategy to your difficulties.
12. Dissolution or exit strategy.
The partnership agreement should indicate the events upon which the partnership is to be dissolved and its affairs wound up.
It’s possible the business concept and model don’t lend themselves to answering this question.
But, for example, in a real estate deal, it’s important to have a timeline and possible triggering events.
That will lead to either selling the property or buying out one of the partners if they don’t want to stick around for the long haul.
Weathervane seafood restaurant
13. A buy-sell provision or separate buy-sell agreement.
This type of agreement addresses major changes in the partnership arrangement.
For example, what if one partner voluntarily or involuntarily leaves the partnership?
How are they bought out? What happens if you want to sell your ownership interest—should your business partner have a right to buy it before you sell it to a third party?
What if your business partner dies? Or gets divorced? Or files for bankruptcy?
Or just wants to retire?
Weathervane seafood restaurant
14. Expulsion provision.
Carefully consider this provision, which is a double-edged sword.
The benefit of such a provision is that you can put it in writing when a partner can be forced out of the business.
For example, you and your partners could agree that if one partner isn’t pulling their weight.
They can be forced out. But be certain your well-deserved, three-week vacation to Tahiti doesn’t trigger the expulsion clause.
15. Noncompete provision.
For example, you and your business partner(s) may agree that if one of the partners leaves the business.
They cannot open a competing business or work for a competing business within a certain number of miles and for a certain period of time.
16. Take care of business.
Once you have decided on partners, write a partnership agreement.
And completing the necessary registration and licensing, you’re almost ready to get to work.
Every business will have a few remaining requirements that are specific to that business.
But almost everyone is going to need business cards and a website.
Get your cards printed and your website up and running, and go out and conquer the world of business.
Weathervane seafood restaurant
17. Miscellaneous provisions.
Some examples include a provision for attorney’s fees for the non-breaching party.
If they win a lawsuit, mediation, or binding arbitration clause.
So you don’t have to go to court if you don’t want to.
Or a venue or choice of law provision on which state law would be applied in a contract dispute and where the dispute would be litigated.
Make sure you sit down with your partner(s) to discuss the best- and worst-case scenarios.
Have a competent and honest attorney represent the company.
Or have each partner hire an attorney to review the partnership documents.
And address the above issues, as well as the individual and specific needs of your and your partners’ particular situation.
BusinessHAB