Imagine that you and your brother have decided to go into business together as residential building contractors. You are considering forming your business as a partnership, but first, you need to find out more about the legal and tax consequences of forming the company. One of the most important steps you can take in forming a partnership is to create a partnership agreement. Having such a document in place with guidelines to follow in case there is a dispute or other issue is important.
In order to ensure that you are in compliance with state and federal business formation requirements and that your formation documents are in order, you may want to consider speaking with an attorney. A lawyer experienced with business law in the Philadelphia area can help you through the process off starting a partnership.
The partnership agreement should include the name that you and your partner have agreed on for the business. Many partnerships contain the names of each partner, however, some people choose to create a name to indicate the type of services the partnership provides. Regardless of the name you choose, you must check with the state to find out if the name is free for use.
The agreement should also address the initial contributions of each partner and expected contributions after the formation. For example, you should make clear the monetary investment each partner will make and the particulars of each person’s participation in the operations.
You and your partner must agree on how you will share the profits and losses of the company. You may choose to be 50 percent partners, or perhaps your partner wants less responsibility and you choose a 60/40 split. The partnership’s profits and losses will be allocated based on your ownership percentages. The agreement should also specify any draw limitations for the partners. For example, to keep the partnership liquid, you may limit partner draws to 80 percent of each partner’s allocated profits.
Another topic that your partnership agreement should address is how each partner will participate in the management of the business. You should assign responsibilities, such as which one of you is responsible for handling the annual tax filings, bookkeeping and other administrative duties.
The agreement should also address how you and your partner will handle disputes. You may choose to require that a mediator must be present to help the two of you settle any disagreements that are bringing operations to a standstill.
If you are considering forming a partnership, it is important that you take steps to ensure the business meets all government requirements and that you have the proper documentation in place.