Business Entity: Partnerships

On the previous post, we tackled about sole proprietorship as one of the three main types of business entities. As Kiyosaki said, sole proprietorship is not the kind of business entity that he can recommend because as a business owner, you would be “solely” responsible and liable to your business and there’s a risk of putting your personal assets in danger if the business fails.

Today, we would tackle the next business entity and that is partnership. Like a sole proprietorship, a partnership requires no special paperwork. It is simple and relatively cheap to start. You and your partner(s) will probably want to operate under a business name, so be sure to register it with the appropriate government agency.

In addition, you should set up an agreement so that each partner’s rights and liability are clearly outlined. Kiyosaki said that in any partnership agreement it’s important to include the following:

• Date of agreement
• Names of partners
• Type of business entity
• Amount of investment from each partner
• Location of business
• Description of proposed accounting system
• Employee management roles
• Draws, salaries, or bonuses
• Division of profit or loss
• Restrictions on fiscal authority and expenditures
• Duration of partnership
• Plans for altering or dissolving the partnership
• Distribution of assets upon dissolution of partnership
• Provisions for settlement of disputes
• Settlement in case of death or incapacitation

Is a partnership the right business entity for you?

Let’s say you don’t want to run the show by yourself. Perhaps you lack the experience to make a success of your business, or you simply prefer sharing responsibility with others. Then you may consider a partnership. It is often said two heads are better than one, and for some people the additional ideas and enthusiasm generated by a partnership can bring comfort to what would otherwise be a daunting task. Partnerships can also increase the amount of available capital, and new businesses need plenty of that.

On the down side, in a partnership you give up a certain measure of freedom and control. People being people, disputes are bound to occur, causing many sleepless nights. It is also important to remember that business decisions and actions taken by your partner are legally your business decisions and actions too, even if you do not know about them in advance.

You are obligated by your partnership to live up to all agreements entered into by the partnership. In a general partnership, as in a sole proprietorship, liability rests entirely on the shoulders of the owner(s). Not only are you fully liable for your decisions, you’re also fully liable for the decisions of your partner. Once again, your personal assets are completely at risk, but now they’re at risk for decisions your partner may make.

Two Types of Business Partnerships:
Kiyosaki said that there are two types of business partnership: general partnership and limited liability partnership.

In a general partnership, you risk your personal assets if the business fails not only for your decisions alone but also from the decisions of your partners.
In a limited liabiliy partnership, as the name implies “limited liability”, one business partner may not be responsible for the another’s misconduct or wrong decision.

Choosing the right business partner(s)
Just as important as the decision to form a partnership is your selection of partner(s). When considering a partner, Kiyosaki recommends to ask yourself the following questions:

• Are you keeping emotions out of the selection process? Best friends don’t always make the best partners.
• Have you taken a careful look at this person’s financial history? A poor credit rating could seriously hobble your business.
• What professional talent does this person bring to the partnership?
• Will this person’s personal life interfere with business?
• Do you share the same values?

If you don’t feel comfortable with your answers, you might want to go hunting for new partners or consider a different entity for your business. On a more personal note, I chose the wrong business partner when I engaged myself into my first business venture when I was 22 years old. I almost lost all the capital that I invested except for the few inventories that I was able to sell. Remember to choose your business partners wisely.

Source: Robert Kiyosaki’s Coaching Program