It is imperative that you have a legal form for your business. It provides a separate existence to the business from your person. The common legal business forms are Sole proprietorship, Partnerships, Corporations and Limited Liability Companies. Each business forms have benefits and risks associated with it. Choosing the appropriate business form for your business is dependent on the type of business you operate and its related risks. Sole proprietorship and partnership are the easiest business forms to adopt as no legal formalities and procedures involved in forming and operating (other than required business permits and licenses). Formation of Corporations and Limited Liability Companies require lengthy procedures and formalities and is comparatively expensive.
When two or more persons are engaged jointly in business, a partnership is the appropriate business form to adopt. Before you enter into a partnership and operate a business, understand the basics of a partnership business. Partnership law stipulates that all partners are jointly and severally liable for the debts and obligations of the business. Severally means that the liability is not in proportion to the partner’s interest in the business but for all of the debts. If one partner is unable to meet his or her part of the liability, other partner or partners have to make good for it. Even after the dissolution of the partnership the liability continues for deeds during the existence of the partnership. Keep this in view always when you constitute a partnership and do business.
A valid partnership can be formed without any formal documents, merely the intent to carry on any trade or business jointly by two or more persons will constitute a partnership. But, as the business activity is conducted by two or more persons, difference of opinion is a strong possibility. The importance of have a written partnership agreement is that it is prudent to have everything in black and white to avoid any future disagreements or misunderstandings. The partnership agreement should clearly state all critical matters such a:
1) capital contribution by each partner
2) the business to be carried on
3) each partner’s rights and responsibilities
4) profit or loss sharing ratio.
If only one partner is active and other partners are dormant investors, a limited partnership can be formed. The active or general partner is then liable for the business debts and dormant partner’s liability is limited to their capital contribution. Generally this form is used for a family limited partnership where the dominant member operates the business and other family members do not actively get involved in business decisions or operations.
