How to Create a Business Partnership in 7 Steps (including links to external resources)

Starting a partnership? Creating a business partnership is a relatively straightforward process that involves a few key steps. Here’s a simple guide to get you off the ground. Perfect for multiple owners seeking a straightforward business structure without the complexities of corporations or LLCs.

What is a General Partnership?

A general partnership is a business structure where two or more individuals share ownership, profits, losses, and responsibility for debts and decisions. It is simple to start in many places, but it comes with the caveat of personal liability for business debts. Personal assets may be used to pay off these debts if the business owes money. Forming a business partnership is similar to the steps a sole proprietor would take when starting a business.

How to Create a General Partnership in 7 Steps

1. Choose a Business Name

  • Pick something that reflects what you do or who you are. Your business name might be consistent with your values or the services you offer. Once you’ve landed on a name, check to make sure it’s not already taken. There are a few ways to do this. The resources accompanying this section will help get you started, like actually.

1a. Naming Resources

2. Draft a Partnership Agreement

  • While not always legally required, a partnership agreement can help protect both of you. This document should outline the partners’ roles, responsibilities, and profit-sharing agreements. Keep it straightforward. Seriously, it doesn’t need to be overly complex. It may include:
    • Partner names
    • Formation dates
    • How profits and losses are divided
    • The process for adding or removing partners
    • How decisions are made
    • Procedures for resolving disputes**

2a. Partnership Agreement Resources

3. Obtain Licenses and Permits

  • Other websites will tell you that what you need varies by location and business type. They will proceed to tell you to check with your city, country and state requirements. While this is true, it’s incredibly unhelpful.
  • If you’re like me and are left scratching your head, refer to the following resources from the U.S. Chamber of Commerce, it’s worth the read and will help cement your understanding on what’s otherwise a difficult topic.

3a. License and Permit Resources

  • The U.S. Chamber of Commerce has an extremely helpful business license and permit guide. This article is best suited for those wondering if their business type requires licenses and permits.
  • You’ll want to bookmark this one, It’s chock-full of helpful materials for many diverse needs and circumstances.
  • The U.S. Chamber of Commerce also has a dedicated sub-section for whether or not you need zoning or building permits.

4. Register Your Business

  • Some states require you to register your partnership, usually by filing a “Statement of Partnership Authority.” This document lists the partnership’s name, its purpose, and the partners’ names. This process varies by location, so check your local government’s requirements by using the SBA link and state lookup function (linked below/right).

4a. Registration Resources

  • The U.S. Small Business Administration has a free state lookup function, providing URLs to state-specific entities (government websites and partner sites). The subject matter is vast, but it’s comprehensive. Start by selecting your state.

5. Obtain an EIN

  • An Employee Identification Number (EIN) is often necessary, even if you don’t plan on having employees. It’s used for tax purposes and to open bank accounts for your business. You can apply for an EIN through the IRS website for free. We’ve included links to these resources below/right.

5a. EIN Resources

6. Set Up a Business Bank Account

  • A business bank account helps keep your personal and business finances distinct. This simplification can be beneficial for tax purposes and personal liability. To open an account, you’ll need your EIN and often a copy of your partnership agreement, which may contain partner names, formation dates, etc.

6a. Business Banking Resources

7. Comply with Tax Requirements

  • Partnerships themselves don’t directly pay taxes to the government. Instead, the money the partnership makes or loses is divided among the partners based on their shares specified in the partnership agreement. Each partner then includes their portion of these profits or losses on their own personal tax returns and pays taxes accordingly. Keep detailed records and consult a tax professional.

7a. Tax Resources

Pros of a General Partnership

  • Ease and Low Costs: General partnerships are relatively easy and inexpensive to form. There’s no need for formal paperwork to start, although drafting a partnership agreement is advisable and may be needed when applying for an EIN.
  • Shared Commitment: Partners can pool resources to fund the business, reducing the financial burden on any one individual.
  • Combined Skills: Partners bring diverse skills and knowledge to the business, enhancing its ability to navigate various challenges and opportunities.
  • Tax Benefits: Profits and losses pass through to the individual partners, who then report this income on their personal tax returns, avoiding the double taxation faced by some corporations.

Cons of a General Partnership

  • Joint Liability: Partners are personally liable for the debts and obligations of the business. This means personal assets are at risk if the business cannot meet its liabilities.
  • Disagreements Among Partners: Differences in management styles, business vision, or the direction of the business can lead to disputes that may be difficult to resolve.
  • Shared Profits: While pooling resources can be an advantage, it also means profits must be shared among the partners according to the terms of the partnership agreement or equally by default.

Partnerships vs. Sole Proprietorships and LLCs

CriteriaPartnershipsSole ProprietorshipsLLC (Limited Liability Company)
Basic Tax InformationProfits and losses are passed through to partners’ personal income tax returns. Not subject to corporate income tax.Profits and losses are reported on the owner’s personal income tax returns. Not subject to corporate income tax.Can choose between being taxed as a sole proprietorship/partnership or corporation. Profits and losses can be passed through to members’ personal income tax returns.
LiabilityPartners have joint and several liability, meaning they are personally liable for the debts and obligations of the business.The owner has unlimited personal liability for the debts and obligations of the business.Members have limited liability, meaning their personal assets are typically protected from the debts and obligations of the business.
Estimated Cost to Get StartedVaries by state, but generally low. Costs include filing fees for partnership agreement (if applicable) and business licenses. Estimated range: $100 – $500Low. Costs primarily consist of business licensing and registration fees. Estimated range: $50 – $300Higher due to state filing fees for articles of organization, and potentially legal fees if assistance is needed. Estimated range: $500 – $1,000+

Now, It’s Your Turn

To launch a general partnership, choose a suitable name, draft a detailed partnership agreement, and ensure you comply with all necessary licenses, registrations, and tax requirements. Although this process is relatively straightforward, be mindful of the inherent risks, especially the personal liability for debts. We’ve provided a range of resources to guide you through each step. Now, it’s your turn to do amazing things.

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