What Are Business Partnerships And How Do They Work?

Home Business Life Insurance

Partnerships are formed when two or more people get together with the express purpose of going into business. Their intent is to make money. The ideal situation is to put people together who specialize in different areas of the business and who can get along with each other. All partners regardless on their area of expertise are responsible for any liabilities incurred and taxes assessed. They also share in the profits earned by the business.

Although a partnership is treated as a separate entity as it can own property and execute documents in other areas...like upon the death of a partner...it is not considered a separate entity. The liabilities of the business rests on the partners and the business is dissolved upon the death of one partner unless there is an agreement which would keep it alive.

When the partnership is formed it should clearly state in an agreement the percentage of shares each partner owns and under what conditions and in what manner these shares should be disposed of. The agreement can be modified later upon the approval of a majority. If there are problems between partners the agreement is the legal document that they should be able to fall back on.

Advantages

• Fairly simple and inexpensive to set up.
• Makes going into business with family members easy and with unlimited potential.
• Capitalizing a business is simpler and the business is much stronger when many people put their resources together.
• Because many people are putting their assets together the borrowing power of the business is much better.
• Each partner has the unique opportunity of specializing in their own area of expertise.

Disadvantages

• Unless otherwise stated in an agreement the partnership must be dissolved upon the death of a partner.
• The remaining partners must purchase or inherit the shares of the deceased partner unless otherwise stated in an agreement pertaining to succession.
• A partner can require that the business be dissolved at any time.
• Cannot take advantage of tax write offs like group life insurance, disability insurance and health insurance.
• All partners are at risk for liabilities. All assets are at risk in a limited partnership.
• If a partner wants to leave the business he may suffer financial loss.

Life Insurance

If a partner decides to leave the partnership voluntarily or if that partner leaves because of disability or even death this can be devastating to those left to run the business. A properly drawn up buy-sell agreement can help alleviate much of the problems brought about by such an eventuality. The most efficient way to fund this agreement is through a life insurance policy.

Let us suppose four people get together to form this business. Each owns 25% of the business. One partner dies. The agreement should have stated prior to death that the deceased partners shares would go to the surviving partners but that the heirs of the deceased partner would be compensated for 100% of the value of his or her shares. To put it another way deceased partners shares would be bought by the surviving partners as per the buy-sell agreement. The proceeds of the policy would pay for the shares. The buy-sell agreement is binding.

Partnerships should also purchase disability buy-out insurance which would pay a lump sum in the event one of the partners should become disabled. The distribution of shares should also be governed by the buy-sell agreement.