Dear Alex:
My best friend and I have started social media marketing business together and would like to form a partnership.
We already have two clients and a business plan.
What do we need to do to create a partnership?
What you probably did not know is that any time two or more people act together and hold themselves out as co-owners of a business, they are automatically and by default doing business as a partnership.
In your case, since you already have clients and, therefore, have held yourselves out as doing business together, you are already a partnership.
An exception to this partnership-by-default rule is when the parties have formed a business association other than a partnership (such as a limited liability company or corporation), in which case the business owners operate under the rules of the business association, which they have chosen.
Now that you are partners in business, it is important that you understand the rules that come with partnership activities.
Business partners have what is called “mutual agency” to act on behalf of the partnership. This means that one partner, independent of the other partners, may create legal obligations of the partnership within the scope of the ordinary course of business – even if the other partners did not specifically know or approve of those activities.
This is useful because it enables business partners to conduct business activities without all partners being present. This is also somewhat risky, because it means that your business partners can create binding obligations on your behalf, which you will be held accountable for.
In addition to the mutual agency authority to enter contracts and make agreements on behalf of one another, business partners are jointly and severally liable for partnership debts and the actions of their business partners.
This means that each partner can be held to be proportionately liable for the debts of the business, or individually wholly liable for the debts of the business.
For example, in the case of two business partners offering a service, if one business partner signs a lease for the partnership to rent an office for five years, the other business partner could be obligated to make those rent payments for the next five years.
Partnerships offer what is called “pass through taxation,” which means that the tax burden of the business is directly passed through to the business owners, which is generally preferable to taxation at the business level and the personal level.
Partnerships do not, however, offer limited liability. Some other entities types can create a layer of protection from business liabilities by restricting the debts and obligations of the business to the business itself. Partnerships do not offer this protection.
There are many factors accompanying partnership and the choice of business entity, and only a few are described in this column.
Business entity choice is an important decision that should be given thorough consideration.
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