Forming 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. However, there may be subsequent disagreements among the owners at a later date, so 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
  • 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

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
  • Open a bank account in the name of the partnership
  • File an annual informational return with the Internal Revenue Service

Related Courses

Partnership Accounting 
Partnership Taxation