A business partnership is an agreement between two or more individuals to operate a business jointly. Partners are responsible for the other partner's business actions, as well as their own.
To form a business partnership:
- List the amount of equity to be invested by each partner.
- Determine how the profit or loss will be divided among the partners.
- Establish compensation levels for each partner, including when the compensation will be given and any restrictions that might affect that compensation.
- Set guidelines for how the business will be modified or dissolved should one or more partners wish to end the partnership.
- Define procedures for settling any disputes which might arise.
- Determine who has authority for which expenditures and how expenditure decisions are to be made.
- Develop procedures to follow in case of death or incapacitation of a partner.
- Write and sign an agreement detailing the responses to the questions above.
- A general partnership can be formed simply by an oral agreement, but a legal partnership agreement drawn up by an attorney is highly recommended.
- Equity can be cash, physical assets or skills. Skills are an intangible asset to which a value should be assigned.
- In a Limited Partnership limited partners have limited personal liability for business debts as long as they do not participate in management.
- The partners report their share of profit or loss on their personal tax returns.