A Partnership, LLC, or LLP doesn’t need to be difficult to set up. One of the easier types of companies to form, a Partnership distributes the business rights and responsibilities across multiple entities, reducing liability for each individual.
If you’ve already gathered your partners, or you just want to do some research first, this Partnership Agreement format will help you jump-start your new venture.
You’ll need to do all of the proper research and homework first, but this template will give you a head-start and a good framework. You should always consult a lawyer though before finalizing any contracts.
If you’re reading this, you’re probably interested in forming a new company. The type of company we’re talking about here is a partnership. But did you know that there are several different types of partnerships? Let’s go through the major ones, and bring you up to speed.
LLP or LLC: What is the difference between a Limited Liability Partnership and a Limited Liability Company? In both variations, one of the main reasons you might want to create such a legal entity is to optimize taxes. The taxes for corporations might have more complicated schedules, rules, and additionally require in general for taxes to be paid on the company side and again when funds are disbursed to shareholders.
The main difference between an LLP and LLC is that the LLC’s parties are called members, and (commonly) are not allowed to have a distinction between managing members and regular members. LLCs can also be formed by a single member, similar to a sole proprietorship, called a single-member LLC. The IRS doesn’t recognize LLC as a business type, so it will either be taxed as a sole proprietorship or a partnership. When you have an LLC, the limitation of liability is referred to sometimes as the “corporate veil.” This is like a firewall or barrier between the members and the company. For example, if the company undergoes bankruptcy proceedings, and can not pay debts, the corporate veil protects members from their personal assets being used to pay these debts.
In theory, at least, the LLC provides some liability protection from its owners, but in a litigation scenario, the usage of an LLC formation document doesn’t always provide this legal protection. If the LLC is a single-member LLC, it is very likely that the corporate veil may be pierced, causing the single owner to be liable for any debts that the LLC incurs.
Formation of a Partnership decreases these risks because the ownership is always spread across multiple entities. It isn’t possible to have a single-member partnership. When the partnership is owned by more than two entities, the risk of the corporate veil being pierced is reduced even more significantly, and the advantages of a limited liability company are clear.
It’s important to note that in some states or jurisdictions, the concept of LLC doesn’t exist. Although you may be able to title your company with LLC, it may only exist by law as an LLP. Carefully review the regulations of your state, city, or other jurisdictions, to ensure that you are forming your company legally and that it is the right type of company for you. Some of the most common types of companies are LLPs, because of the convenient capabilities of this business type. They are nearly universal, with regulations for very similar company types worldwide, so no matter where you go, many companies around will be LLPs. Law firms, financial companies, and service companies all benefit from being an LLP, which basically means that the owners can’t be sued directly for damages owed by the LLP.
In an LLP, partners should contribute some assets to form the company’s initial capital contribution, then the partners should own a percent of interest in the company. As the company makes profits, the profits will be distributed to the partners in pieces relative to the size of interest they own, also known as dividends. When partners receive these profits, they pay taxes on it as they would for their personal income. This is generally the way it works in the US, but in other countries, the LLP might need to pay VAT or a corporate income tax, the same as corporations, which is why you always need to do the research for your own jurisdiction.
In our LLP Partnership Agreement template, we try to be as concise and simple to understand as possible, eliminating or avoiding many of the whereafter’s, wheretofor’s, and herewithin’s of old legalese. The old ways may sound very official but can lend credibility to dismissal arguments on the basis of misleading language. In reality, for most purposes, you need plain, simple language to make all of the terms and conditions required for your contracts clear.
The Partnership Agreement is the document used to create the LLP. In some jurisdictions, this is formally called “Articles of Formation,” or “Charter”. In an LLC, it is called the “Operating Agreement.” We include the basics and encourage customization as it will surely be required for your local laws and code relating to starting a business. Different cities, counties, and of course states, provinces, and countries all have the authority to write custom regulations for businesses. Most likely, you will need to register your LLP in several different locations, such as a company that operates in two different states, or multiple cities, or even counties. Each has their own registration procedure, but a good rule of thumb is to start at the federal level and work down from there.
In many states, once you register at the state level, you can then simply refer to the state registration when registering in the county and city. First, you will need to get an EIN and/or BIN from the federal government, then you can begin the first registration process with the state to obtain your legal LLP’s name (which may require a certificate of record indicating that no one has used the intended name already). After the state, it’s most common to register and obtain a business license for the principal city of operation. Small companies will only have one city, but larger companies may need to register in multiple cities if they conduct business there. That all depends on the individual city’s laws.
In the Partnership Agreement, you and your partners will need to agree on a lot of custom terms, as each business arrangement is different. You might have one business partner that owns the majority of interest and the rest of your company might consist of several other smaller partners. Because of the wide variety out there, we’ve given you a format that is highly flexible, allowing you to customize based on your specific needs. Of course, always keep doing your research, but now you should be off to a great start with your new business.