The Benefits and Challenges of Setting Up a Business as a Partnership

Reasons Why You May or May Not Want to Enter a Partnership

The concept of a business partnership has been around for thousands of years. In fact, the Code of Hammurabi, one of the earliest known sets of laws, provided guidelines for the relationships between business partners. Though sole proprietorships are still the most common form of business venture, partnerships are nearly as common. It’s not surprising, given the ease of setting one up. There are benefits to the partnership form, but there are also some drawbacks. What are the different types of partnerships? What are the benefits and detriments of the partnership form?

What Is a Partnership?

A partnership is a legal relationship between two or more parties for a specific legal purpose. Often, that objective is a commercial enterprise. Technically, the partnership is an agreement (or contract), though the agreement may be written or oral, express or implied.

In Texas, a written agreement is not mandatory to establish a business partnership, but is fairly common. Typically, the partnership agreement will set forth the respective rights and duties of the parties, as well as how income and profits will be allocated.

The Common Types of Partnerships

As a general rule, there are two types of partnerships:

• General partnerships, where all partners equally share in profits and losses
• Limited partnerships, typically composed of one or more general partners and one or more limited partners. In these entities, the limited partners are typically only liable up to the amount of their investment in the enterprise. They customarily have limited management or ownership rights as well.

The Advantages and Disadvantages of a General Partnership

General partnerships offer a wide range of benefits:

• Ease of setup—They require little to no effort to set up and can actually be created simply by conducting business as a partnership. A general partnership may be created without a written document, though that can pose problems when there are disagreements.
• Easier access to financing—A partnership does not require the sale of shares of stock, though written documentation of loans or other investments is a good idea.
• Fewer reporting requirements—With a general partnership, there’s customarily no requirement of periodic meetings and there are no annual filing requirements with the state of Texas

There are also potentially significant drawbacks to establishing a general partnership in Texas:

• Liability—In a general partnership, each partner is jointly and solely liable for the debts of the partnership. In addition, there is the potential for unlimited personal liability, which means that your personal assets could be used to pay the debts and obligations of the partnership.
• The profits are equally shared, irrespective of the contributions of the parties—Certain partners may be paid salaries as employees, but the partners share equally in all profits.

Contact MCIS Law

At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to businesses and business owners throughout southeast Texas, handling all matters related to business formation. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.