PARTNERSHIP BUSINESS: Definition, How It Work, Pros & Cons

Have you ever wondered the reason behind McDonald’s exclusively serving Coke and KFC solely offering Pepsi? Both franchise giants have established a unique business partnership with these beverage competitors, which has resulted in each of them gaining sole access to their respective audiences. One growth hack that is often overlooked in marketing strategies is the establishment of strategic business partnerships with complementary brands. While it’s a common practice for established companies, many startups tend to overlook the benefits of forming strategic partnerships that can yield faster returns on investment and save time in the long run. This article aims to provide a comprehensive understanding of partnership business agreement, including the example and the general limited partnership.

What is Partnership Business?

A business partnership is a formal arrangement that is typically established through a documented agreement between two or more individuals or entities. This legal relationship outlines the terms and conditions of the partnership and governs the conduct of the parties involved. In a partnership, the partners contribute their capital to the business and share in the profits as well as the losses. Partnerships that operate as business entities typically have to register with every state in which they conduct business. It is crucial to have a clear understanding of the various partnership options available in each state prior to registration. This knowledge will enable you to make informed decisions about the type of partnership that best suits your needs.

Is Business Partnership a Good Idea?

Yes, it is. When business owners form partnerships, they gain access to a plethora of tools and services that make setting up and running a company much easier.

Partnership Business Agreement

A business partnership agreement, also known as a partnership contract or articles of partnership, is a formal document that spells out the roles and responsibilities of two or more people or businesses that are working together as business partners. This document can also go by the name of articles of partnership. In order for business partnership agreements to be executable, they need to contain particular components and stipulations that are in accordance with the local, state, and federal agreement laws.

How to Write Partnership Business Agreement

When creating a business partnership agreement, it is essential to consider all potential issues that may arise in the co-management of the business. One of the most straightforward methods for creating a business partnership agreement is to engage the services of a qualified attorney or to locate a customizable template. So, when creating your own agreement, it is advisable to seek out a template from a company that shares similarities with your own business. It is also important to follow a logical process and ensure that the agreement includes the necessary information. This typically includes:

#1. Fundamentals of Business

First, you should list the company’s name, its organizational form, and the state where it will do business.

#2. Operations

Explain why you’re forming this relationship and what you hope to accomplish.

Specify how much ownership each partner has in the company. List the privileges and obligations of each spouse.

#4. Procedure for Decision-making

Define who is responsible for what in terms of making decisions and how they are made. Specify who is responsible for making business decisions and who must authorize new partners. Don’t forget to detail how the partnership splits up its gains and losses.

#5. Liability

If the business is set up as a limited liability company (LLC), the agreement ought to specify how much each partner is responsible for business bills and losses. Effectively forming a partnership requires the use of multiple documents, including articles of incorporation. Even if business partners have a partnership deal, they may still be at risk.

#6. Resolution of Conflicts

Dispute resolution provisions are a necessary feature of any business partnership agreement. Disagreements are typical in business, even when you’re working with family or close friends.

#7. Dissolution of Business

In the event of a business dissolution, a partnership agreement should outline the actions to take. Establish partnership entry and exit rules. Also included should be a plan for the smooth transition of leadership in the event of a partner’s departure.

Partnership Business Example

There are numerous partnership business examples, including the following:

#1. Dr. Pepper & Bonne Belle

In 1973, Bonne Belle introduced the world to Lip Smacker, the first flavored lip balm. The original tastes were strawberries, green apple, and lemon. In 1975, they decided to work with Dr. Pepper to develop what would become one of the most widely distributed lip balm flavors ever: Dr. Pepper. They collaborated on fresh advertising phrases for the lip balm.

#2. BMW and Louis Vuitton

The pairing of Louis Vuitton and BMW is likely to raise eyebrows at first. However, they have many similarities. Both encourage jet setting, with Louis Vuitton’s reputation for producing stylish travel bags. Luxury is vital to both of these well-known companies, and their products consistently receive praise from consumers. The BMW i8 is a luxury vehicle, and Louis Vuitton designed a set of four bags and luggage that fit neatly into the trunk. Together, they displayed their commitment to advancing both technology and culture.

#3. “Red Bull and GoPro”

The corporate alliance between Red Bull and GoPro is a good example. Red Bull sells more than just energy beverages, and GoPro sells more than portable cameras. They are both aspirational lifestyle brands with comparable aims.

#4. Companies like Herwin-Williams and Pottery Barn

Co-branding campaigns allow companies to introduce their products or services to those who might not otherwise encounter them. That’s what the 2013 merger between Sherwin-Williams and Pottery Barn accomplished. They collaborated on an exclusive line of paints, and then PB added a new section to its website where buyers could select the paint colors they wanted to match their furniture. Both companies benefited from this arrangement, and they shared articles showing readers how to paint and decorate on their own.

#5. Casper and West Elm

Casper is a well-known online retailer of mattresses and related products. Popular videos on YouTube demonstrate the unboxing procedure, and the company offers a 100-day money-back guarantee. However, if customers can’t lay on the mattress before buying, they may reconsider. Casper chose to team up with West Elm so that customers could actually lie on the mattress before buying it. West Elm was also able to display a selection of modern bedroom furnishings. Both companies benefited from the co-branding arrangement since their respective customer bases grew. It also provided customers with extra opportunities to test out mattresses and bed frames before making a final purchase decision.

General Partnership

A general partnership is a type of business structure where two or more individuals come together and agree to share tasks, resources, and financial and legal obligations of a jointly-owned business. In the context of a general partnership, partners mutually assume personal responsibility for any potential liabilities, which may be unlimited in nature. Unlike partnerships formed as limited liability partnerships or limited liability companies (LLCs), liabilities are not subject to a cap. In a partnership, the partners assume responsibility for any debts incurred by the business. It is also important to note that in the event of default, the confiscation of an owner’s assets may be a potential outcome.

In addition, it is important to note that any partner within the business may be subject to legal action for any outstanding debts incurred by the company. The owners of a general partnership receive profits and losses as the entity itself does not incur taxes. This means that each partner is responsible for reporting their respective share of partnership profits or losses on their own tax forms. The partnership, as an entity, is not subject to taxation.

Is a General Partnership Right for Your Business?

A general partnership can be a viable option for your business if you are considering collaborating with a trusted individual. General partnerships are a popular choice among professionals due to their straightforward and uncomplicated setup process. So, if you have a trustworthy business partner, you can commence your entrepreneurial journey by establishing a general partnership without any delay. Partners only require a verbal agreement, but it is advisable to have a written partnership agreement. Furthermore, you do not have to file forms with your state and the transmission structure will not subject you to any corporate taxes.

While a general partnership can offer many benefits, it also carries certain risks, particularly in terms of liability. That means if you or your partner(s) make any errors, such as accumulating debt, you both will be held responsible. If your partner takes any unfavorable actions without your consent, such as entering into a contractual agreement with a software firm, you must still comply with the agreement’s provisions. In the long run, you determine the choice of the business structure by considering your association with your prospective business partners and your willingness to assume liability.

Limited Partnership

A limited partnership (LP) is a type of partnership that consists of two or more partners. It is important to note that a limited partnership should not be mistaken for a limited liability partnership (LLP). In a limited partnership, the general partner assumes the responsibility of managing and operating the business, while the limited partners are not involved in the day-to-day management of the business. In a limited partnership, the general partner assumes full responsibility for the partnership’s debts and obligations, while the limited partners are only liable for the total value of their investment. This means that the general partner has unlimited liability, while the limited partners’ liability is restricted to their investment amount.

How Does Limited Partnership Work?

Limited partners, as the name implies, have a restricted involvement in the company’s operations. Limited partners are commonly referred to as “passive investors” or “silent partners.” Investors usually provide financial resources to the company and participate in the revenue generated by the business. Nonetheless, their involvement in the operational aspects of the business is limited. Similar to investors in a firm, limited partners bear liability for business financial liabilities only to the extent of their investment in the business as a whole. To clarify, when a limited partner makes a $1 million investment in the business, their personal liability in the event of a lawsuit against the company is limited to that amount.

How Is a Partnership Taxed?

When it comes to partnerships, it is mandatory to file an annual information return that details the profits, losses, deductions, and other relevant information pertaining to its operations. However, it is important to note that partnerships are not required to pay income tax. The company does not retain profits or losses but rather distributes them to its partners.

Why Would a Business Choose Partnership?

When it comes to business, partnerships can offer a plethora of benefits that can help take your venture to the next level. One of the most significant advantages of partnering up with someone is the opportunity to bridge the gap in expertise and knowledge. By pooling your resources and working together, you can tap into a wider range of skills and experience that can help you tackle challenges and seize opportunities that you might not have been able to on your own.

Another advantage of a partnership is the potential for more cash. With more people involved in the business, you can raise more capital and invest in new projects or expand your operations. This can also help reduce costs, as you can split expenses and share the burden of running the business. Partnering up can also open up more business opportunities, as you can leverage each other’s networks and connections to reach new customers or partners.

What Is a Major Weakness of a Partnership?

In a partnership, the partners assume unlimited liability for the debts of the business. In a partnership, it is also important to note that each partner assumes ‘joint and several’ liability for the partnership’s debts. This means that each partner is responsible for their portion of the partnership debts, as well as being responsible for the entirety of the debts.

How Many People Can Be in a Partnership?

A partnership is a business arrangement in which two or more individuals come together to engage in commercial activities. In a collaborative business venture, individuals are required to pool their financial resources, assets, expertise, and efforts. As a result, they become entitled to a portion of the earnings and bear a proportionate share of the losses incurred by the enterprise.

In a Nutshell

A partnership is a formal agreement that enables multiple individuals to jointly assume responsibility for a business. In a business partnership, the owners not only split the profits and ownership but also the workload, accountability, and potential losses. Collaborating with the right partner can be a game-changer for a budding enterprise, opening up a plethora of avenues for success. However, a hasty or ill-considered partnership can lead to mismanagement and discord, ultimately impeding progress.

References

contractscounsel.com
businessnewsdaily.com
upcounsel.com
investopedia.com
uschamber.com