In this article, we explore the definition of a partnership and how to form one.
Further, we explore the types of partners and the types of partnerships that exist in law.
Are you trying to form a business with another person?
If so, by the end of this article, you will have established which type of partnership will be the best fit for the business of your choice.
What is a partnership?
A partnership is a business relation that is formed by two or more people who agree to share the profits and liabilities of a business carried on by all or any of them acting on behalf of all.
It is immaterial if the people intend to form a partnership or not. The threshold for the existence of a partnership is the evidence of an association of two or more people who are in business as co-owners of such a business.
Consequently, individually, the people who have formed a partnership are called partners. Whereas collectively they are known as a firm and the name under which their business operates is the “firm name”.
Formation of a partnership
A partnership is formed either through express or implied terms.
For partnerships formed through express terms, they will be created through words, orally or in writing.
In the United States, if parties in a partnership have an express terms partnership with no partnership agreement in place, then the relevant laws, i.e., either the Unifrom Partnership Act or the Revised Uniform Partnership Act will apply the governing rules.
An express partnership will be governed by a partnership deed or an Articles of Association.
A partnership deed is an agreement that is made by partners and outlines the various terms and conditions that govern the resulting business agreement.
Articles of Association are a common partnership agreement, more common in limited liability companies.
Articles of Association, as a legal document, specify the regulations of a company’s operations; further defining the purpose of a company.
In addition, the important details contained in an Articles of Association include:
- Company Name. A suffix such as Inc. or LLC or LLP should be present to show the entity is a company.
- Purpose of the company. States the clear reason for the creation of the company.
- Share Capital. Outlines details about the number and type of shares that comprise a company’s capital.
- Organization of the Company. Details about the company such as the number of directors, the company’s physical address, and the identity of the original shareholders, owners, or partners.
- Shareholder meetings. Outlines details of the first general meeting of shareholders. Further information that can be stated includes the rules governing subsequent meetings. For example, annual general meetings, rules on voting, and passing of company resolutions.
Different types of partnerships
There are several types of partnerships.
General Partnership
This type of agreement does not require a legal business entity. The partnership exists even without a formal company.
The agreement forming this partnership will clearly outline the rights and responsibilities of individual partners.
Also, each partner will represent the firm with equal rights i.e., they have equal rights in terms of management and decision-making.
If one partner is sued by an aggrieved person, then, all other partners are considered accountable.
Limited Partnership
This partnership requires a general and a limited partner.
The General Partner will have unlimited liability, making all management decisions for the business. A limited partner will only have minimum control over the business. A limited partner will only invest and take a profit share.
Limited Liability Partnership (LLP)
This is the commonly used partnership in the legal fraternity.
The LLP is a formal structure that requires a written partnership agreement and usually comes with annual reporting requirements, depending on your legal jurisdiction
A partner will be responsible for their negligent acts, and bear the damage caused by their actions.
Limited Liability Company
This is a form of business entity that is regulated by state statutes or a Memorandum of Agreement (MOA) or Articles of Association.
An MOA is a legal document that outlines the details of a business partnership.
Some of the details that an MOA should have include
- The purpose of an agreement. Here, parties should outline their names, the scope of work, financial obligations, and the date of the agreement.
- The Roles and responsibilities of the partners.
- Length of the partnership agreement.
- Modification and termination of the agreement.
- Signature of parties to the agreement.
The major differences between an LLP and an LLC is in its formation and debt appropriation.
An LLC may be formed by a general partner and a company whereas an LLP stricltly requires at least two partners.
Who is a partner?
A partner is a co-owner or an investor in a partnership.
In a law firm, a partner is an attorney who buys into a firm and generates revenue in exchange for a share of the business profits. A partner will be a partial owner of a law firm.
Different types of partner
Managing Partner
This is a senior executive who occupies the top leadership in a firm. Furthermore, a managing partner also doubles up as an owner of a business.
Silent Partner
This is a person whose role in a partnership s only limited to providing funds for the business.
Therefore, a silent partner will not take part in the day-to-day management of the business.
Named partner
A named partner is a person whose name will appear in the official name of a partnership. A named person is one of the people who founded the company or a senior member of the business.
In a law firm, a named partner’s name will usually appear on the front-office desk.
Limited Partner
This is a partner who is specific to a limited partnership agreement.
Thus, a limited partner will also have a share in the profits of a business. However, a limited partner is more like a silent partner because they do not take part in the running of the business.
A limited partner only provides funding and will not be responsible for debts or liabilities accrued in a partnership.
Conclusion
Different reasons exist for formation of partnerships. Make sure to contact a lawyer or attorney for the best advice on which partnership suits your business.