When you are in business with another individual or group of individuals, you have to carefully consider your corporate partnership structure. All solid partnerships in business begin with a strong partnership agreement. Your agreement should detail each part of your business, along with what each partner should contribute and what he or she gets back in return from the company’s profits.
A big part of a partnership agreement should address the subject of equity. Partner equity is the partner’s amount of interest in the company. Not all partnerships are divided equally. Equity is determined by the individual’s contributions to the company. Contributions do not need to be in the form of cash. However, capital may be a big part of this calculation. A partner may contribute equity in the form of assets, supplies, ideas, labor or other helpful things that create value within an organization.
When your team is put together as a general partnership, the interest in the company is typically equally divided among all individuals. Each person has the same amount of responsibility when it comes to making decisions and managing the daily operations of the organization. While this type of structure is easily managed on paper, it can be challenging in the realities of business. For a general partnership to work, all team members must constantly be evenly contributing value to the company. That value doesn’t necessarily have to come from cash, but additional capital is something that may help a business expand.
Partners in this type of agreement may have an understanding of each member’s role and future contributions. One person may decide to solely contribute financial resources, while another owner may focus on contributing sweat equity to the overall success of the business. In this type of structure, along with equally divided contributions and ownership portions of the company, all owners are also equally liable in case of business default.
With a limited partnership, there is a bit more flexibility when it comes to supporting the business. Partners are not expected to strive to provide the same type of support for the business at all times. Because it’s a limited agreement, some partners may elect to offer only a portion of the contribution that the primary owner may be pursuing.
In those cases, the member who has added the least amount of value to the venture gets the smallest amount of equity in the company. This partnership agreement can help business owners who may not want to take on the responsibility that comes with a general partnership. For those individuals who want to be involved, but on their terms, they can put in the time, effort or cash that they are comfortable with and get their fair portion of revenue back as well.
Limited Liability Partnerships
The last type of corporate structure partnership found in the business world is the limited liability partnership. Similar in makeup to the limited partnership, this structure further relieves a partner from holding personal liability to their business’ obligations. This can help protect one partner from business decisions made by another person involved in the company. That way, silent partners, who may not be involved on site with management or the everyday financials, don’t get placed with the heavy burden of being held liable for a company’s business problems. In this type of partnership, the equity structure may not be evenly divided up. The value of each person’s contribution to the firm is considered, and a portion of the profits is assigned as per the partnership agreement.
Creating a strong partnership agreement can help businesses that are structured around combinations of individuals working together. If everyone knows what is needed and what to expect, there is less of a chance for disappointment or unexpected consequences. When each individual’s contribution to a company is carefully considered and valued, the team can work better together to create a strong, effective business.
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