Business partnerships are getting popular amongst entrepreneurs as they come with a bagful of advantages. An efficient partnership plays a crucial role in driving up any venture. If you are looking to dive into the intricacies of ‘Partnership’, then this article is for you.
What is a Partnership?
A partnership is a kind of business organization where two or more individuals pitch together to carry out the business. When the two persons enter into the contract, they are bound to share profits and losses equally.
The economy of the United States permits entrepreneurs to run a business together, under the different options that come under the partnership law. Partnerships are a reflection of marriages which calls for sound understanding, efforts, and desires of both parties to reach the goal.
A Partnership Firm type of legal entity formed by two or more parties agreed up certain clauses pertaining to the business. This agreement is known as ‘Partnership Deed’ which describes the route to operating the business as a single entity. In the United States, the Partnership Firm is governed by the Uniform Partnership Act.
There are 5 essential elements of any business partnership which are necessary to be present for any partnership to be valid.
1. The Presence of Contract
The very foundation of a partnership is having a contract. No partnership can be shouldered through status, operation of law, or inheritance. For example: If the guardian of the family who was running the business partnership succumbs to death, then their heir cannot become a partner unless he/she enters into the contract with the other partner.
2. Number of Partners
At least two people are required to constitute a partnership. It is necessary to decide how many partners will be there and what will be their contribution. You should also decide the type of partnership beforehand to avoid future problems.
3. Carrying on a Business
This is the third essential element that necessitates the agreement of the parties involved to carry on the business. Other than charitable work, the word ‘Business’ constitutes every trade, occupation, or profession.
However, if two people agree to share an income or jointly purchase any property without continuing the business, then they are more of co-owners and not partners.
4. Sharing of Profits
The fourth essential element calls for the mandate of sharing profits between the partners and carrying with the business. The parties involved are obliged to share profits, however, the ratio of profits shared is up to the discretion of the parties.
5. Mutual Agency in Partnership
This element highlights that every partner, is both an agent and a principal for himself as well as the other partner. The actions of one can bind the other and vice versa. The essence of this element is that both are answerable to each other, hence a mutual agency is needed.
Benefits of Partnership:
There are several reasons why partnerships are in vogue, let’s have a quick view of them.
- Partnership Firms are easy to start and maintain due to the simple registration process.
- Allows for structured and consensus-based decision-making.
- Each partner enjoys equal powers that lead to easier coordination.
- In case of cheating, legal advice or service can be taken from business lawyers to settle the disputes in and out of court.
- Easier to raise funds in comparison to a sole proprietorship.
Rules to Follow for Strong Partnership:
Establishing a strong business partnership is imperative to flourish the venture. Here are some golden rules that you must follow to smoothen the partnership process:
1. Defining Job Roles
A cogent and detailed of the duties must be handed over to each party to avoid unnecessary frustration. Since each human offers a unique set of skills, assigning job roles would add finishing to the business goals.
2. Defining Exit Strategy
It is important to lay down the exit strategy beforehand as it acts as a lifeguard in case a misfortune happens or the business sinks. It encompasses legal clauses regarding the division of business assets, partnership insurance, etc.
3. Utilizing the Strengths and Weaknesses of Your Partner
Keeping the legal terms aside, some emotional and humanitarian terms should be taken care of. Each of the partners must be aware of their strengths and weaknesses as it cushions the connection and support between the parties, ultimately adding to the business growth.
Business partnerships require a lot of patience and commitment. The more time and effort you spend thinking and discussing all the strategies you will be using in the future, the more likely your long-term business collaboration will be successful.