Partnerships

Avoid disaster. (Wikimedia Commons)

E-Commerce start-ups are notorious for setting up partnerships in an informal way.  This usually leads to disaster.

As I wrote previously, you  and your partners may wish to set your business up as a corporation.  If you do, then “partners” are really shareholders in the corporation, holding stock certificates.  Each shareholder has legal rights, such as a right to to review the books.
If you and your co-owners choose not to set up as a corporation, then your partnership will be a true partnership.  There is almost no limit on the maximum number of partners.  Furthermore, the partners do not need to have equal shares of ownership.  For example, a lead partner might hold 40% of the business while six more partners hold 10% each (adding up to 100%).  Furthermore, profits need not be distributed according to the share of ownership.  Making things even more interesting, a partnership need not distribute all of its profits to the partners.  In fact, a partnership might opt not to distribute any money to its partners.
To avoid legal problems, as soon as two or more people get together to form a business, they should write out a partnership agreement.  What are the responsibilities of each partner? Who owns what percentage of profits?  How are profits distributed?  How are decisions made?  
Partnership taxation is tricky.  The partners must plan in order to avoid a situation where partners must individually pay income taxes on their shares of the profits that they didn’t actually receive in cash.
Furthermore, before the business appears promising, the partners should visit an attorney to formalize their agreement.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

Trackbacks/Pingbacks

  1. Dividends explained « Accountinator - May 22, 2012

    […] are distributions of profits to stockholders.  Corporations pay dividends; dividends paid by partnerships and sole proprietorships are called “withdrawals” or […]

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