Limited Liability Partnership Overview
In strict legal terms, partnership is “the association of two or more individuals who decide to become co-owners of a business with the aim to make profits, whether or not they intend to form partnership”. Meanwhile, partners may choose to establish limited liability partnership that protects their personal assets in case that their business goes bankrupt.
According to corporate lawyers, partnership is the only business structure which can be formed by a simple oral agreement. However, written contract is better than oral agreement which often lead to misunderstandings and disputes.
To avoid legal loopholes and provide solutions to all possible problems, partners, especially those who are new in the business, should hire corporate attorneys who can draft a comprehensive partnership agreement. Usually the cost of this legal service ranges from $500 to $2,000.
DRAFTING A PARTNERSHIP AGREEMENT
To establish a limited liability partnership, involved parties should consider all the possible problems they may encounter, thus allowing them to draft a partnership agreement that will provide solutions to potential disputes and problems.
When establishing a written document, partners should also consider the purpose of their business and the duties and obligations of each co-owner.
- The decision-making process and the voting rights of each co-owner
This is considered to be one of the most important entries in drafting a partnership contract, the decision-making process is usually based on “majority wins” system. However, if a business has only two partners who have conflicting decisions or there is a 50-50 votes, the partnership agreement may include a provision about an independent or third party (usually a trusted associate) who can vote to break a tie. - Shares in ownership and authority
It is important to include the percentage of ownership and authority of each owner to avoid disputes. - Possibility that some partners may decide to leave the business
When drafting a contract, always consider the possibility that some partners may decide to leave the business due to disability (or death). Some may be terminated for breach of contract while others may just decide to resign.
Some partnership agreement do not allow outside entities to be become co-owners in the business. If this is the provision, partners are the only ones who are allowed to purchase shares of a leaving partner.
Some companies also include in the provision that a neutral third party (e.g. accountant, appraiser, and banker) will determine the price of the leaving partner’s shares.
PROS AND CONS OF PARTNERSHIP AGREEMENT
Establishing partnership is easier and less expensive compared to most business structures. Apart from these, partnership offers favorable taxation which is also enjoyed by small-scale businesses.
Also, this business structure does not follow formalities such as regular meetings which are required in corporation.
However, partnership also has its consequences. According to Los Angeles lawyers, each partner is responsible for the action of another partner.