Just like with any other business entity, in order to form a partnership, you need to complete a few different steps. If you’re wondering how to start a partnership and what steps this process entails, our article will give you a detailed overview on every step required to form a partnership.
First, we’ll provide a brief overview of all the benefits and drawbacks of forming a partnership, in case you’re still not convinced that this is the right business structure for you. We’ll continue with a step-by-step explanation on how to start a partnership, and we’ll end with a detailed FAQ section where we answer some questions that will clarify this process further.
Without further ado, let’s begin by defining what a partnership is.
What Is a Partnership?
A partnership is a business structure shared between two or more people who are responsible for the business. Partners divide the profits among themselves, but they also share the responsibilities and liabilities that come with forming a professional alliance.
Business partnerships are a relatively easy business structure to form, which is one of the many reasons why so many people choose partnerships over more complex business structures, like companies and corporations.
There are three main types of partnerships, all of which come with their own benefits and drawbacks: general, limited, and limited liability partnerships.
Benefits of Starting a Partnership
Now that we provided a general overview of what a partnership is, let’s explore some of the benefits you can get if you decide to form a partnership.
Exchange of Knowledge and Ideas
Forming a partnership is a great way to acquire new knowledge and ideas related to the business. Ideally, your partner will bring unique skills and information to the table, which could complement yours and lead to an amazing and productive collaboration. If you have some areas in which you’re not very experienced, forming a partnership would allow you to work with someone who might excel in those areas, and vice-versa. Together, you could combine your strengths and allow your partnership to thrive.
You Can Share the Financial Burdens With Someone Else
Every business goes through periods that don’t bring much financial gain. When this inevitably occurs with your business, you can rest assured knowing you can share any potential losses with your partner.
Likewise, the initial cost of forming a business can be quite high, so having someone to share the forming expenses with is of immense help.
Sharing the Workload
Apart from sharing financial burdens, you’ll also get to share the workload with your partner(s). Having an extra set of hands is always beneficial and saves a lot of time which can be invested back into the business. You can divide responsibilities among each other and share the burden of tedious tasks to get more work done in less time.
Less Paperwork and Filings
Unlike corporations, partnerships require very little paperwork on an annual level. Once you complete the initial paperwork when you’re forming the business, you won’t be left with a lot of paperwork to complete throughout the year.
Every partner in the business has to sign the initial operating agreement where all the individual responsibilities of each partner are listed. Apart from detailing the responsibilities, this document also includes the distribution of profits. When you’ve completed signing this document, you will have to complete your tax filings, which isn’t very time-consuming, especially if it’s delegated among all the partners, and that’s about it.
More Business Opportunities
By forming a partnership, you’ll automatically be connected to a wider web of people whom your partner knows or has collaborated with in the past. This increases your chances of forming future alliances, as well as getting more sponsorships and clients. It’s a win-win situation for both parties.
There are some benefits that pertain solely to Limited Liability Partnerships. For instance, LLPs are granted liability protection, which protects the partners and their personal assets from any failures or mistakes made by their partners. These regulations vary from state to state, so make sure you do your research to determine if these apply to your state.
Drawbacks of Starting a Partnership
While there are many benefits of forming a partnership, there are also some crucial drawbacks you should be aware of.
You Have to Consult Your Partner for Everything
One of the drawbacks of forming a partnership is that you’re legally obligated to consult your partner for everything, even the most minor decisions regarding your business. While this can be an advantage to the indecisive among us, some people find not being able to act independently in a partnership suffocating and burdensome.
You Need to Split the Profits
On the flip side of sharing the financial losses with someone is having to split the profits. The more business partners you have, the smaller share you’ll get from the profits.
Partners Have Disagreements
Disagreements are a natural part of forming partnerships, but it’s something to consider. It’s normal to face conflict as long as it’s resolved in a healthy manner. If all else fails and you can’t find common ground, you’ll have to resort to liquidating the business.
One of the main drawbacks of starting an LLP is that it can’t exist in every state, as only a limited number of states allow for the formation of LLPs. This could potentially be a problem if you’re set on forming an LLP in a particular state.
How to Form a Partnership
Here are some of the most important steps when it comes to forming a partnership.
Choose a Partner/Partners
You can’t have a partnership without choosing a partner or partners with whom you will collaborate on the business. Choosing a partner can be a hard process if you don’t have someone in mind, but there are some things that could help you make the right decision.
For instance, carefully consider your partner’s work experience to determine whether you’d be a good match. Take into consideration any skills and knowledge they might have and ponder on whether that would benefit you and your upcoming business. Moreover, you need to make sure that your potential partner is financially stable and able to support the costs in the initial formation stage of your business. If you want to go the extra mile, consider doing a credit check on your partner.
Last but certainly not least, you should also consider your potential partner’s ethos, professional values, and their ambitions and goals regarding the business. Ensure that you are on the same page in terms of where you want your business to go to avoid potential conflict and misunderstandings in the future.
Take your time in considering who you want to work with. At the end of the day, this is a big decision and you don’t want to rush it.
Decide on the Type of Partner and Partnership You Want to Have
The next step in forming a partnership is choosing the type of partnership, which will determine the partners’ roles. There are two main types of partners: general partners and limited partners.
General partners will closely collaborate with you and help you make day-to-day decisions regarding your business. They’ll share operational control with you and have unlimited liability. Limited partners, on the other hand, won’t take part in the small decisions of your business, but will financially support it.
Likewise, there are three main types of partnerships: general, limited, and limited liability partnerships.
General partnerships are the most basic type of partnership, one that is between two partners, both of which share the same workload. With general partnerships, you can form your partnership by simply signing a partnership agreement. The profits are usually split equally among the partners.
Limited partnerships are partnerships that can consist of two or more partners, one of whom is a limited partner who contributes financially to the business but isn’t actively involved in running it.
Limited liability partnerships are partnerships that work similarly to general partnerships, but all the partners involved have limited liability. In other words, none of the partners can be held responsible for the actions of the other partners. However, they are still responsible for any debts or claims regarding the business.
Once you’ve made your decision, it’s time to move on to the next step.
Decide on a Name
The next step requires some creativity and it involves deciding on a name for your partnership. Depending on what kind of business you’re forming, you can choose to be innovative, or opt for a simple approach that involves combining all the partners’ names in the business’ name, such as Smith & Miller. The latter option is more common in general partnerships that consist of two partners. There are pros and cons to both approaches, so consult your partner and choose what you think is right for your business.
Keep in mind that your name will be included in the partnership agreement, in your application for an Employee Identification Number, and in many other filings. Once you decide on a name, you need to check if it’s already taken. You can use an online search engine or run a trademark search for this purpose.
Register Your Partnership With the State
Before your business is up and ready to go, you need to officially register it with the Secretary of State. In most cases, you can complete the application online, so you won’t have to worry about losing additional time or hiring legal help.
Some partnerships extend beyond one state. If you’d like your partnership to operate in multiple states simultaneously, you’ll need to complete the same registration process in every state where you’re planning on conducting business. Your partnership will be domestic in the initial state, whereas all the other partnerships will be considered foreign.
Apply for an EIN
The next step to forming a business partnership is applying for an EIN. Just like with the previous step, you can complete this process online in a relatively short amount of time. Keep in mind that some businesses require different types of ID numbers, such as state tax ID number, so check carefully to ensure that you end up with the right EIN number.
Craft a Partnership Agreement
One of the most important steps in forming a partnership is creating a partnership agreement. This document states important information regarding how much every partner contributes to the business, their responsibilities, what happens in case of conflict, death, or illness, and how to liquidate the business in case of unforeseen circumstances. Apart from covering these points, partnership agreements vary from business to business, depending on the type of partnership you decide to form.
Partnership agreements are complicated to create and require following specific laws in your state, so consider hiring a legal advisor if you think you’ll need some help in the process.
It’s important to note that not all businesses require having a partnership agreement, but many entrepreneurs decide to make one to help provide clarity and direction in hard situations and avoid conflict.
Get Any Licenses and Permits
Depending on what kind of business you’ve decided to form, you might need to obtain certain licenses and permits. The law regarding licenses varies from state to state, so do your research to figure out if you’ll need one.
Typically, the most common business sectors that require a license are the following: childcare, medical care, food and alcohol, pharmaceuticals, cleaning services, travel, and construction.
Hire Employees
If you and your partner(s) decide that you’ll need help running the business, you might want to consider hiring a couple of employees to help get your business started.
Keep in mind that once you hire employees for your business, you will need to complete some additional obligations with the state, such as paying taxes for your employees.
Open a Business Bank Account
Now that you’re a business owner, it’s imperative that you open a separate business account to distinguish between your personal and your business finances. Operating from only one account could lead to potential conflicts and misunderstandings with your partners, so it’s best to avoid that scenario.
Opening a business bank account is a relatively simple procedure that only requires your EIN, partnership agreement, and an official business name.
Get Insurance
Last but not least, don’t forget to get insurance. Remember, unlike with LLCs and corporations, you and your partner(s) will be personally liable for any claims, debts, and lawsuits for your business, unless you’ve formed a limited liability partnership. Therefore, getting insured as soon as you start your business is a good idea to protect your personal assets in case something happens to your business.
FAQs
What Is Needed to Form a Partnership?
Some crucial steps in forming a partnership include obtaining an EIN, creating a partnership agreement, and obtaining a name for your business.
Is It Easy to Form a Partnership?
Forming a partnership is a relatively simple and easy process compared to forming other types of business structures, such as companies and corporations. In most cases, all you’re required to do is follow a few easy steps and your partnership will be ready to start operating in no time.
Can You Pay Yourself a Wage in a Partnership?
Yes, as a partner in your business, you can pay yourself a wage, but you need to ensure that it’s properly taxed.
How Is Profit Split in a Partnership?
The profit distribution in a partnership depends on the agreement between the partners. Most partners, especially in general partnerships, split it 50/50, while others have a different agreement depending on the contribution of each partner and what’s stated in the partnership agreement.
Final Thoughts
We hope our article elucidated the key aspects of starting a partnership and that now you feel prepared to begin a new business adventure.
One of the most important steps in starting a partnership is deciding whom you want to partner with and what kind of partnership you want to form. Once you’ve made that decision, all you have to do is follow a few simple steps such as obtaining an EIN, signing a partnership agreement, and obtaining any licenses and permits that your business might require. To make things easier, you can hire a legal consultant to help you through these steps.