Put simply, a partnership interest is the percentage of a partnership owned by a particular member or individual. Partnerships in this context refer to specific way of organizing business ownership wherein each owner is a partner, normally with equal rights, privileges, and obligations to the company as a whole. The interest represents each partner’s right to make decisions regarding the business, obtain a draw from the profits that the business brings in, or contribute to the liabilities of the enterprise as a whole. Often, the interest is represented by a percentage. For instance, if a partnership consists of four people and all have agreed to share equally in the profits and losses and they have contributed equal capital to the partnership, then each has a 25% interest in the partnership. Not all divisions are equal, though, and in some scenarios certain partners hold greater interest than others. Much of this is often based on seniority, expertise, and other factors unique to the business at hand.
No matter the setting, the most common types of partnership, and by extension individual interest, are general, limited, and limited liability. Each comes with its own specific rules and regulations governing partner obligations, as well as what to do in the even that the partnership dissolves or a named partner wants to leave.
A partnership is usually created when two or more people or organizations become co-owners of a for-profit business. When a new capital venture is undertaken by two or more people, an often overlooked factor is the partnership interest of the parties involved. An entrepreneur forming a partnership may have a passion for a new twist on a restaurant, but will be better served by creating a partnership with others who understand the restaurant business. In this case, the entrepreneur's interest will be defined by the partnership agreement with the other partners aiding in the financing and providing additional expertise to the new company.
There are a number of ways of structuring a partnership from a legal standpoint, but the three most common models are the general partnership, the limited partnership, and the limited liability partnership. These types of business agreements can be created via an oral agreement, such as with a general partnership, or by creating a written agreement, such as with a limited partnership or limited liability partnership. The agreement spells out the roles, decision-making, responsibilities, dispute resolution, and liabilities of the venture. In most places these agreements also have important tax and liability ramifications that affect everyone in the agreement.
A general partnership is the simplest and easiest type of partnership to form. By default, and unless specified in a partnership agreement, all partners will share equally in the profits and losses of the partnership. Thus, all will have an equal partnership interest. Daily managerial decisions may be handled in a variety of ways, usually split among those partners with expertise. The general partnership is normally structured as majority rule for more important business decisions.
Limited and Limited Liability Alternatives
Limited and limited liability partnerships tend to be more complex. They are usually prepared by legal professionals to specifically spell out the interest of each partner and the way the partnership is to function. Liability protection is an important function of either of these types of partnerships, and it can be tailored to the needs and roles of each member.
A limited partnership consists of at least one general partner and at least one limited partner. The limited partner is shielded from personal liability based on the acts of the company, while the general partner is not. In order to be shielded from liability in a limited partnership, the limited partner cannot make important decisions regarding the company or manage its operations. A limited liability partnership, on the other hand, shields all partners from liability, and each partner can have an identical partnership interest.
Dissolution and Unwinding
Relinquishing a partnership interest isn’t always easy. In most cases, the partners decide at the outset what to do in the event that one or more partners want to leave the venture at some point, and ramifications are set out in the original creation documents. The departing partner usually owes an obligation to the remaining members both in terms of asset allocation and assignment of liability. Depending on how the agreement was structured, getting out can be a costly and involved process. Sale of an interest or partial partnership can also have profound tax implications in many jurisdictions.