Restaurants Organized as Partnerships: Pros and Cons
A partnership is formed when two or more people go into business together. This is a popular business arrangement for smaller restaurants. Think of the typical mom-and-pop restaurant, where married couples form a partnership and write a partnership agreement, which states who is responsible for each aspect of the business.
Benefits to Being in a Partnership
Money is the biggest advantage to going into a partnership when starting a new restaurant. Since opening a restaurant involves a lot of capital, splitting the startup costs with another person (or group of people) reduces the monetary burden on one person.
Secondly, including more people means that each person’s individual skills and experience can complement the other’s and benefit the business. For example, if you are an ace with bookkeeping and managing others but cannot cook, partnering with a skilled chef to open your restaurant might be a wise business decision.
Drawbacks of Restaurant Partnerships
As with any business arrangement, partnership comes with its share of drawbacks. Like a sole proprietorship, each member of the partnership can be personally liable for the business’s debts and actions of the other partners. If the business falls behind on its payments to debtors, the collection agencies can come after a partner’s personal assets to cover the debts. If the business is sued for injuring a customer, again, a partner’s house or other personal assets can be seized to cover the legal ramifications.
Another drawback to forming a partnership is that personality conflicts might arise that can damage the business. Differing management styles are usually the root cause of partnership disputes, and if they are not resolved properly the partnership can dissolve and the business collapse.
The Partnership Agreement
One of the ways to help your business partnership run more smoothly and hopefully solve problems before they occur is through a partnership agreement. A partnership agreement usually contains the following elements:
- Contributions to the partnership. Contributions can take the form of money, collateral or other assets that can take the place of startup funds. For example, one partner might contribute money to cover equipment purchases and other startup costs, while the other partner might own the building in which the restaurant is placed.
- Allocation of profits and losses. Most partnerships will allocate profits and losses equal to the percentage of monetary contributions each partner has made. The easiest example is a two person partnership where each party invests 50% of the startup capitol, so all of the profits (or losses) are shared 50-50.
- Partners’ authority. This establishes the management structure of a partnership. It is especially important for partnerships where more than two people are involved. If you do not spell out who is in charge of what aspects of the business, conflicting management styles can hurt the business.
- Admitting new partners. If you want to take on new partners to bring either more money or new talent into the business arrangement, the partnership agreement should stipulate how this process is to take place. A common method for admitting new partners is through a vote by the existing membership.
- Withdrawal or death of a partner. Sometimes one partner will want out of the arrangement, or a partner may pass away. It is important that the partnership agreement explains how each share of the business will be divided up (in cases of death) or how it will be bought out by the remaining partners.
- Resolving disputes. In any business arrangement, disputes will arise. Writing a conflict resolution clause into your agreement will help minimize the negative effects of a dispute by outlining steps for resolving problems. One of the easiest methods for resolving disputes is to get an arbitrary third party to mitigate, rather than taking your disputes to court.
Downloadable Tax Forms and Partnership Agreement
The following forms are required by the IRS for anyone who becomes a member of a partnership business:
- Form 1065. This form reports the total profits/losses of the partnership to make sure each partner is paying their fair share of taxes on personal income. >> Download Form 1065
- Schedule K-1. This schedule gives the breakdown of each partner’s share in the business and how much of the profits/losses they are responsible for. >> Download Schedule K-1
- Form 1040. This is the individual tax return where the person has to report any losses and pay taxes for his or her share of the business profits. >> Download Form 1040
Start with a Business Lawyer
All of the taxation and paperwork involved with partnership formation can be quite daunting for an individual. If you are thinking about going into business with another person or group of people, you will want to get a business lawyer to help you get things started. A business lawyer will have up-to-date information on the legal requirements of forming a partnership in your state. They will even help you draft your partnership agreement and get together any other forms necessary to get your business up and running.
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