Business and entrepreneurship have become part and parcel of a thriving society. Finding the business to start is another step towards realizing the business objectives. However, finance and management may be an issue you may need assistance with, which may end up getting into a partnership. But what is a business partnership? How do you find a business partner? How do you form a business partnership?
A partnership is a legal business entity where two or more people come together to run a business with a common goal. Partnerships can get grouped according to the liability of partners, period of operation, and their activities. According to liability, general and limited; duration of operation-permanent and temporary; Activity-trading and non-trading.
The types of partners include active and dormant, general and limited, major and minor, quasi and real, secret, retired and partner in profit.
Who is a business partner?
A business partner is a party that has agreed with one another to form and run a business. These parties may be individuals, companies, or legal entities. In a business partnership, two or more people form a business and agree to share responsibilities, profits, and losses.
Like a sole proprietorship, a partnership is financially and legally inseparable from its members. Profits, losses, liabilities, and debts may be passed to each member’s personal income for tax purposes.
Types of business partners (Business partnerships)
In this section, we’ll cover four different types of partnerships people can form depending on their jurisdictions:
1. General partnerships
A general partnership is the most basic form of a business partnership. It is a business arrangement by which two or more persons agree to share in all assets, profits, losses, and legal liabilities. All partners have independent power to bind the management of the business, loans, and even contracts.
Ownership and profits generated from the business are usually split evenly among partners or as per their partnership agreement deed. Each partner in a general partnership has a total liability, meaning they are personally responsible for all debts, losses, and other financial liabilities.
One of the advantages of a general partnership is that it is easy to form and dissolve. Just like other partnerships, a general partnership does not require incorporating the business with the state. In most cases, persons willing to form a general partnership only sign a partnership agreement.
2. A limited partnership
A limited partnership (LP) is a formal business entity recognized by the state. It has one or two general partners who manage the business and at least one limited partner who funds the business. This type of partnership is also created by two or more individuals who perform different responsibilities.
General partners have unlimited liability for financial liabilities such as debts, while limited partners have limited financial liability up to the amount of their capital. Limited liabilities invest in a limited partnership for profits and are not responsible for the business’s financial liabilities.
Limited liability partners are also known as silent business partners. They can share the profits a business generates but cannot lose more than the total amount they invested.
3. Limited liability partnership ‘
A limited liability partnership (LLP), just like a general partnership, is a flexible legal and tax entity formed by two or more partners who actively engage in business management. The only difference is that each partner in a limited liability partnership has limited liability for other partners’ grave actions. The partners still bear full responsibility for the business’s legal and financial liabilities, but they’re not responsible for other partners’ mistakes.
In the United States, limited liability partnerships (LLPs) are not allowed in all states. In states where they are permitted, they allow certain professionals, such as accountants, lawyers, and doctors, to form them.
4. Limited liability limited partnership
A limited liability limited partnership (LLLP), just like a limited partnership, is a type of partnership with at least one general partner and at least one limited partner. One of the distinct differences of an LLLP is its general partners have limited legal and financial liability.
One of the advantages of LLLP partners is that they can do anything that regular LP partners can do.
Ways to find a business partner
While you might be fortunate enough to meet a good business partner from friends you hang out with, not everyone is lucky to find a partner from their friends. Sometimes, you need a little legwork to find a great business partner. Here are ways to find a business partner:
- Evaluate your past and present colleagues and co-workers to determine who could make ideal candidates for a business partnership.
- Attending industry events such as trade shows, private lectures, and conferences can present great opportunities for finding a great business partner.
- Explore different online and offline networking opportunities.
- Consider partnering up with a sibling or other family member.
- Attend an industry-related training or business course and keep an eye out for partners.
Note: In order to make a great choice on the kind of partner you are looking for , its good to understand the categories below. The partners can be classified depending on the following:
Classifications of partners
1. According to role:
Active – The partner is involved in the day-to-day running of the business.
Dormant – also referred as sleeping, passive or silent partner. The partner is not involved in day to day running of the business but contributes his capital but his profit tend to be lower than active partner.
2. According to liability:
General – The partner has unlimited liabilities.
Limited – the partner has limited liabilities.
3. According to age:
Major – the partner has achieved age of majority (above 18 years) and he is responsible for the debts of the business.
Minor– The partner has not achieved the age of majority (18years). The partner enjoys profit but doesn’t get involved in running the business. The partner is admitted with consent of the other partners who is or are major partners. Once he reaches 18 years, he then decides if he wants to be a partner or not .
4. Capital contribution:
Quasi– Also called nominal or ostensible partner. The partner doesn’t contribute the capital but allows the business to use his name. In most cases these are retired partners who leave their capital as a loan and in-turns gets interest. The partner also get profit share as a reward for using his/her name in influencing customers.
Real– The partner contributes capital for the business
Note; Other types of partners include secret partners, retiring partners, partner in profit and incoming partners.
Ways to attract business partners
Some proven strategies for attracting business partners include creating an ideal partner profile, creating a business development pipeline, using warm introductions when you approach a potential partner, and creating an email nurture sequence to build trust, among others.
How to form a business partnership
While each jurisdiction has its own guidelines regarding business partnership formation, here are some general steps to follow:
1. Choose the type of partnership structure
The first thing is to discuss with your business partners and choose the type of business partnership to form. Also, contact the local Secretary of State’s office to inquire about the type of business partnership allowed.
2. Choose the name of the partnership
The name of your business partnership should align with the focus of the business you want to start, the names of each partner, and any designation. Some states may require you to register the name at the Secretary of State’s or county clerk’s office if you use a fictitious name.
3. Draft a partnership agreement
The next step is to draft a partnership agreement that outlines rules about the general partnership, each partner’s responsibilities, and profit and loss distribution among partners.
4. Meet all regulatory and tax requirements
When forming a business partnership, ensure the business meets all local, state, and federal tax and licensing requirements. The requirements may include obtaining a business license and an employee identification number (EIN) for tax purposes.
5. Obtain insurance
Insurance is not a requirement when forming a business partnership. But since partners of a business partnership are held liable for financial loss and legal matters, it is a good idea to obtain relevant insurance to cover the business.
Can I Join an existing partnership?
A new person can be introduced into an existing partnership as a partner with the consent of all the existing business partners.
Some of the things you need to consider before joining an existing partnership include the following:
- What is the existing partnership agreement?
- The partnership’s current debts and financial liabilities.
- Whether the existing partnership has a pending legal case.
- The partnership’s current assets and liabilities.