Partnership Contract Forms

Written by Helen Glenn Court
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All in all, there are about the same number of sole proprietors in business in the United States as there are partners--17 million to 16 million. The number of partnerships--and we're talking about unincorporated businesses, not the mega legal firms typical of Washington, New York, and Chicago metropolitan areas--comes to not quite two million. That works out to more than 70 percent of small businesses being sole proprietors and only about six percent being partnerships.

Partnerships Versus Sole Proprietorships

Partnerships, however, offer greater security, more flexibility, and the possibility of more income. Let's look at the legalities. A partnership is a business with more than one owner that has not formed as either a corporation or a limited liability company (LLC). There are two types of partnerships--general and limited.

In a limited partnership, one or more partners run the business. One or more others contribute capital and share in the profits but otherwise have nothing to do with the running the business. In general partnerships, each partner has an equal share in all aspects of the business. Partnership contract forms are critical in defining both the type of agreement and the details of it.

Certainly the simplest form of business for more than one person, partnerships are also the least expensive and the easiest to dissolve. With these freedoms, however, come a few strings. One is liability. Partners are personally responsible for all business obligations. That is, if the partnership goes belly up and with creditors knocking at the door, the partners are liable for those debts. Creditors can go after--and possibly get, under a full legal umbrella--a partner's house, property, car, bank account, investments, or other possessions. With the stakes so high, your contract forms need to be ironclad and created by experts.

Other basic characteristics of a partnership include what is known as joint authority. That is, one partner can bind the partnership to just about any business deal, the only limitation being that usually all partnership assets cannot be put at stake. The details of the partnership agreement, however, are critical in this regard. Joint liability is another self-explanatory basic. Partnership taxes, unlike those of an LLC or corporation, devolve onto the partners personally. The IRS thus calls a partnership a "pass-through entity."

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