If you’re looking into starting a business partnership in the United States, you’re definitely not alone. Read on for advice on what you’ll need to consider before you launch your venture.
Now that we’ve outlined the basics of getting started as a sole proprietorship in the USA, we’ll examine the launching of a business partnership. If you’re not alone in your business venture, as is often the case with small businesses and firms, you’ll want to look into the particulars of setting up either a General or Limited business partnership. Keep reading for information on registration, preliminary legal considerations, tax obligations, and more. If you’d like more information on starting up in the United Kingdom, be sure to check out our articles on the subject here, and be sure to check out our rundown of common business structures if you’re looking into how to launch your company. Keep in mind that in a business partnership, your business plan should also specify the responsibilities and liabilities of all partners involved in the venture — don’t forget to check out our free business plan templates to help you get started. Keep in mind that for certain business partnerships, you may want to think about establishing an LLC, or Limited Liability Company. Stay tuned for our upcoming article on this business model.
First steps
A business partnership is a business venture including two or more partners. As with a sole proprietorship, you’ll need to register your business under a chosen name; make sure that, if the name isn’t a given family name, that it’s a business name that isn’t already in use in the state or states in which you would like to do business. As with any nascent business, you’ll need to draft a business plan — be sure to check out our business plan templates Excel to help you write the strongest and most detailed business plan possible to help your start-up get a head start. As in a sole-proprietorship, you and your partners will need to be extra-attentive to insurance concerns: be sure to discuss auto, liability, health, and property, and especially how your business venture may change the coverage you each should take out. Be sure to check out our article on contingency plans and a few mistakes to avoid as a new business.
General or Limited?
Even without supporting paperwork, a General Partnership is technically formed when two or more individuals do business together in order to draw a profit for the parties involved. In a general partnership, which, absent a written agreement specifying otherwise, is the general model for any business partnership (registered or not), all parties involved in the business are equally responsible for the venture’s debts and liabilities. This means that in the event of bankruptcy or a lawsuit, each individual’s personal finances are taken in equal parts to be collateral. In a Limited Partnership, however, liability is not shared equally. Limited partners are not liable for business debts or lawsuits, but they also tend to hold less power in the partnership as far as decision-making and even profits may be concerned — they are not running the business the same way that the partner(s) with unlimited liability for the venture. Furthermore, a Limited Partnership is not the default, and therefore can only be formed according to strict state-specified legal procedures, and you’ll need to file with your state’s Secretary of State office. Go here for more information on obligations and registration in your state.
Taxes
Like a sole-proprietorship, a business partnership is a “pass-through” venture and therefore, taxes on business income will be paid by partners on their income from the business. Federally speaking, partnerships file form 1065 with the IRS each year, and each partner individually is to fill out a Schedule K-1, detailing the repartition of income, losses, deductions, etc. Certain states also require filing at the state-level. If the business makes a profit, each partner also needs to file self-employment taxes on a quarterly basis according to their net income.
Registration
You’ll need to file with the IRS in order to obtain an Employer Identification Number or EIN, but don’t worry, you can do it immediately and for free on their website. Be aware that you’ll need to register for a new EIN when or if ever a partner leaves your business or a new one is integrated.
As mentioned before, go to the US Small Business Administration site in order to get more specific information on registering in your state.
Your Partnership Agreement
As mentioned previously, a business partnership can be formed without a written agreement, as soon as two or more individuals begin doing business together in order to draw a profit. Even if an informal agreement made between partners agrees to a certain repartition of liability and profits, depending on the law in your state, these agreements may not be valid in the eyes of the law. It’s a good idea in any business venture to put things in writing, creating a record as well as a paper trail should need be. A business partnership agreement should outline several aspects of your new venture, and this is where the details become even more important than before. It might be a good idea to consult an attorney, but if your budget does not allow for this, you can find legal templates for establishing partnerships can be found online at sites like LegalZoom. Here’s a non-exhaustive list of information that your partnership agreement should cover:
- Basic information: your business’ name, address, and members.
- Partner information: each partner’s Social Security Number, capital and/or material contribution to the venture, and their personal addresses.
- Repartition of Profits and Losses: how will profits and losses be shared, in what percentage, across the partnership? This should be reflective of the investment of the partner in the business as well as their liability for it.
- Decision-making: How will business decisions be made? Who, if anyone, has veto power over certain decisions? How does hiring happen? Who can sign contracts and cheques? If your business decides to keep it democratic and go with a voting scheme for decision-making, what percentage is needed for a movement to pass?
- Calling it Quits: This is perhaps one of the most important aspects of the business partnership agreement. Should the venture not go as planned or should one’s personal life simply intervene and make involvement in the business complication or impossible, it’s important to lay down a procedure and conditions for the dissolution of the partnership and the conditions upon an individual’s leaving it. This section gets into asset distribution — this is where who gets what is decided. This section should also address the procedure in the event of a partner’s death or disability.
Conclusions
If we established anything here, it should be that getting your business agreements in writing is especially important for a new enterprise. Businesses rarely need such paperwork when everything is going according to plan, but as soon as a dispute or problem arises, it’s always helpful to have you and your partners’ terms, obligations, contributions, and more, in black and white. A strong business partnership can be exceptionally rewarding, and are ideally a combination of different personalities, skills, interests, and points of view that will strengthen your venture and make it more likely to succeed. Just be sure to keep communication open and recorded, and be sure to check the specific obligations that may be in effect in your state at the USA SBA website.