Getting sued for something your business partner did might not be fair, but it's often legal. A limited liability partnership shields you by limiting how much you can lose because of your partner's mistakes or negligence. Just like a regular partnership, you need an agreement spelling out how the partnership will work. Even if you're best friends with your partner, writing everything down keeps you on the same page.
Forming an LLP
Each state sets its own rules for how to form an LLP, or whether or not LLPs are even legal. North Carolina, for example, has several requirements:
- Your firm must have a name distinguishable from any existing LLPs in the state.
- You must have a registered North Carolina agent who can accept legal papers for the LLP.
- You have to register the LLP with the state government, paying a registration fee.
You don't have to file your partnership agreement with the state. The law doesn't even require that you have an agreement, but it's still a good idea. Not only does it simplify running the partnership, but without an agreement, state laws control many aspects of your business decisions.
Which Partner Does What?
You and your partner or partners all have equal authority to run the business. You might assume you'll make decisions unanimously; another partner might assume a majority vote; partner No. 3 might figure everyone can make decisions individually, without consultation. One of the functions of a partnership agreement is to resolve questions like that before they come up.
You can delegate daily business operations to a committee or to a managing partner. Alternatively, you can divide up authority: One partner handles finances, one hires the staff, one provides the services. A good agreement spells all that out. It also covers what happens if you need to make a decision but you're deadlocked.
Read More: What Is the Minimum Interest a Partner Can Have in Partnership?
Following the Money
Disagreements over money can demolish a partnership. Use the agreement to resolve the big money questions before you open your doors:
- How much does each partner contribute to the company? Will the contribution be cash, equipment, sweat equity or something else?
- What ownership percentage does each partner have?
- How do you divide up profits? Even if you put up more money than your partners, you might want to divide profits equally.
- When do you get to take the money out? Profits can be distributed at the end of the year or withdrawn periodically.
Preparing for Changes
Even a good, profitable partnership might have to change. If you grow, you might want to bring in more partners. You or one of your partners might want to cash out and leave, or one of you might die. Planning ahead can make these and other transitions happen smoothly.
- handshake image by Anatoly Tiplyashin from Fotolia.com