Forming a partnership
/What is a Partnership
A partnership is a business arrangement in which two or more people own an entity, and personally share in its profits, losses, and risks. The exact form of partnership used can give some protection to the partners. A partnership can be formed by a verbal agreement, with no documentation of the arrangement at all.
How to Form a Partnership
The main steps involved in forming a partnership are as follows:
Select a name for the partnership
Register the trade name for the partnership
Create and sign a partnership agreement
Obtain tax licenses and other operating licenses as needed
Obtain all relevant types of business insurance
The Partnership Agreement
When a verbal partnership agreement is used, there may be subsequent disagreements among the owners at a later date regarding what was originally agreed to. Consequently, it makes sense to create a written document that states how certain situations are to be handled. This partnership agreement should at least cover the following topics:
The rights and responsibilities of each partner
Whether partners are designated as general partners or limited partners, since this impacts their responsibility for the liabilities of the partnership
The proportions of partnership gains and losses to be apportioned to each partner
Procedures related to the withdrawal of funds from the partnership, as well as any limitations on these withdrawals
How key decisions are to be resolved
Provisions regarding how to add and terminate partners
What happens to partnership interests if a partner dies
What steps to follow to dissolve the partnership
The proportions of residual cash paid out to the partners in a liquidation
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Additional Partnership Formation Activities
In addition to the partnership agreement, the partners must engage in a number of other formation activities that are common to all types of businesses. These actions include:
Register the business name
Obtain an employer identification number
Obtain any licenses required by governments where the partnership plans to operate, such as a sales tax license
Open a bank account in the name of the partnership
File an annual informational return with the Internal Revenue Service