The first question is why are you forming a partnership? While a partnership is very easy to form, it often does not provide the protection of other business entities and should be avoided. Nonetheless, if you decide to form a partnership, there are some protections you should keep in mind.
A partnership is the most basic business formation. Unlike LLCs and corporations, no paperwork is necessary to create a partnership under North Carolina law; the only requirement is two or more people who intend to carry on as co-owners of a business for profit. But just because a partnership can be formed without the benefit of any paperwork, it doesn’t mean that is the best route to follow.
Unlike other business entities, each member of a partnership has unlimited liability for the debts of the partnership. This liability is not limited to business assets. Creditors of a partnership can (and do) levy against the personal assets of the partners. In theory, if you own 5% of a partnership, and bad business decisions leave the partnership in debt for $1 million, you could be found personally liable for the entire amount.
One way to avoid this is by registering as a limited liability partnership (which will be discussed in another post). Another way is by drafting a partnership agreement, setting down the terms and scope of the partnership in writing. A well-drafted clause in a partnership agreement setting the limits of the scope of the individual partners’ authority can prevent you from being personally liable for a contract made in the partnership’s name. In general, if one partner signs a contract that is not within the scope of his authority under the partnership agreement, the remaining partners will not be personally liable for that contract. In some instances, such a clause can allow the partnership to recover real property which one partner has signed away.
In addition to limiting the scope of authority, a partnership agreement should spell out how the ownership of the partnership should be divided, how the partners will share profits and losses, and how an individual partner can withdraw from the partnership. A little bit of planning before entering into the partnership may save a lot in litigation expenses on exiting the partnership.
At Miller & Monroe, we have experience with small businesses clients, and we would be happy to draft an agreement custom-tailored for your partnership.
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