The well-known American filmmaker Steven Spielberg understands the importance of collaborating with the right people. “I love creating partnerships; I love not having to bear the entire burden of the creative storytelling, and when I have unions with George Lucas and Peter Jackson, it’s really great; not only do I benefit, but the project is better for it.”
It’s true. A strong bond with a business partner helps cement success. We’re here to help you lay the groundwork for a win-win situation by providing information on what a business partnership involves and the steps on how to start one.
What’s Involved in a Business Partnership?
In a business partnership, two or more people agree to manage a business and share the profit or loss. Legally, they co-own the business, share skills and invest resources into the partnership usually in the form of capital. Some owners actively work for the business while others may have limited participation as investors or shareowners.
Partnership owners register their company in the state where they conduct business. They also draw up a legal document called a partnership agreement. It designates the roles and responsibilities of the owners, how much of the profit or loss each partner shares, and spells out what happens when a partnership ends.
Most business owners elect to set up their business as a partnership because of a major tax advantage. Partnerships don’t pay income tax but pass the profit or loss to the individual partners who report the information on their personal tax returns. However, partnerships are usually more expensive to set up compared to a sole proprietorship since more legal and accounting services are required. You can keep reading Sole Proprietorship vs Partnership to have a better understanding of the difference between both business structures.
Steps to Start a Business Partnership
These general steps are meant as a guideline to help you start a business partnership. Keep in mind that each state’s requirements may vary.
- Decide on the type of partnership: General partnerships share in the responsibility for liabilities and debts. As one of the partners, you’re liable for another partner’s malpractice and negligence even when you aren’t involved. Therefore, each partner’s assets could be taken by creditors if the partnership can’t pay its bills. Limited partnerships, on the other hand, include both general and limited partners. Limited partners are passive participants because they aren’t involved in day-to-day management decisions. Partners in a limited liability partnership also share liability equally, and they can report their own taxes after receiving their share of the profit. You should contact a professional to answer questions you have about which type of partnership is better for your business.
- Select a name for the partnership: Your business name should build your brand and identify the goods or services you provide. Make sure your preferred business name isn’t already used by someone else in your state. Your local county registrar or secretary of state office can check for you. Then, trademark your business name. You may also want to set up a website using the same name as your business name. Again, verify that a specific domain name is available.
- Consult with an attorney and accountant: A partnership agreement, as explained above, governs and details how you operate the business and accounts for what-if scenarios so you can settle disputes should they arise. The agreement should specify the assets each partner owns, the amount of compensation and when payments are made, how partners intend to split profits, and specific guidelines on how to resolve conflict. By all means, you should understand the partnership agreement before you sign it. Know which decisions require a unanimous vote, your rights as a partner, and the buy-sell regulations when a partner dies, divorces, or leaves the business partnership. It’s better to request the help of a business attorney or an accountant to prepare your partnership agreement, instead of trying to draft this key document on your own.
- Register your partnership name with your state: You’ll need to fill out a certificate of registration of partnership with your Secretary of State office to register your business name and pay filing fees. Some partnerships also register fictitious names (DBA – Doing Business As) they intend to use.
- Apply for other licenses: You should apply for a business license and depending on the nature of your business, you may need to obtain other Federal, State, and local permits and licenses. If you’re a retailer, you need to register your business to collect sales tax. If you fail to apply for required permits/licenses, you may pay penalties and fees.
- Apply for a business identification number: The IRS issues a federal number called an EIN (Employer Identification Number) which identifies your partnership as a business entity. The number streamlines many business activities such as opening a partnership business checking account, filing and paying business taxes, hiring employees, applying for business loans and establishing business credit. Remember that, as a business owner, it’s vitally important to keep your personal and business income and expenses separated.
- Purchase business liability insurance: Not only do you need to protect your small business but partners need to safeguard their personal assets. A business insurance agent can recommend the best coverage for the business and partners’ needs.
A Business Partnership Has Benefits
When you establish a partnership, not only do you have other people to share ideas with, but each of you contributes a different perspective in order to succeed. Not only that, you both split the costs to run a business and increase the business’s borrowing capacity.
Don’t forget you have someone else to take up the slack when you need to be off and garner moral support when encountering setbacks. All in all, it’s possible to achieve more when there are two people working to achieve the same goals.
If you’re still on the fence about whether to start a partnership or going alone, we invite you to read Tips to Have a Successful and Harmonious Business Partnership.