Q. Should I form a partnership?

A. The advantages of a partnership are that one of the parties can donate, time, money, or expertise that the other parties do not have. However, even all three of those elements may not be sufficient for the success of a partnership.

Partnerships have a higher failure rate than sole proprietors or corporations, and many partnerships fail within the first year or two. Therefore, it is very important to have a written partnership agreement which spells out exactly what will happen when one of the partners dies or decides to terminate the agreement. There should be a detailed checklist of what happens to capital equipment, cash on hand, and goodwill when the partnership terminates.

A good planning tool for a partnership is a buy-sell agreement. This is an agreement that can be funded through life insurance and protects one’s investment upon death and insures family members or other business partners of enough monies to continue the business or support a family. Partnerships require special tax record-keeping which sometimes is an extra burden that the sole proprietor does not have. Attorneys who draft partnership agreements have checklists of the provisions which should be spelled out to avoid common pitfalls.

Special estate planning techniques should also be considered when a partner draws a will or trust to clearly identify what happens to partnership assets. As you can see, there are many aspects in partnership planning for which the average person will need competent counsel to assist them.

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