Steps Involved in Setting Up a Partnership
There are two types of business partnerships: general partnerships and limited liability partnerships. The five steps involved in setting up a partnership are: 1) choose a name, 2) determine which state to register in, 3) determine the specifics of how the partnership will be managed, 4) draft a partnership agreement, and 5) obtain an Employer Identification Number and business bank account.
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UPDATED: Dec 17, 2020
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Setting up a business partnership is generally a straightforward process. Two basic types of business partnership exist: the general partnership and the limited liability partnership. Both types of partnership are relatively easy to set up and follow many of the same basic steps, but creating a limited liability partnership often demands more attention to organizational details. Hiring an attorney to walk you through the limited liability process is thus advisable.
Step One: Choose a Name
When setting up a partnership, the first thing you will want to do is choose a name for the partnership. While this may sound simple, you need to be sure the name does not violate the trademark rights of another business. There are several ways to determine if another business already has your desired name. You can do a name search online through the website of the U.S. Patent and Trademark Office (USPTO), as well as a search of registered business owners, though this has to be done through the secretary of state’s office in each state.
Step Two: Determine Which State to Register
After you have decided on a name for your partnership, you must determine the state in which to register your business. While this decision is especially important for corporations because of the differences in corporate law among states, for partnerships it is less so. Generally, laws pertaining to partnerships are fairly uniform throughout the country, and many times the terms of the partnership agreement themselves will supersede state provisions governing partnerships. A good rule of thumb here is to register the partnership either in your state of residence, or in the state where you plan to do business.
Step Three: Management, Investments & Profits
Next, determine the specifics of how the partnership will be managed, how much each partner will invest, and how the profits will be shared. While the greater the size of the investment means the larger the percentage of ownership, the biggest investor may not even want to run the business. Also, while you may determine that all partners have equal power in decision-making, certain partners may have to be designated as having the authority to make decisions on day-to-day operations and the general management of the business. Making these structural determinations early on will ensure that the business starts off smoothly.
Step Four: Draft a Partnership Agreement
Once you have made these preliminary decisions, draft a partnership agreement. While a partnership agreement is not required, it is strongly advised. A partnership agreement will lay out the percentages of ownership and the details of how the partnership is to be run under various circumstances, helping to avoid any conflicts between partners down the road. Having a partnership agreement on record may also allow you to bypass certain provisions of state partnership law, which is handy if you do not happen to agree with some of them. If you expect that your agreement may be complex, or just want some advice on drafting a partnership agreement, consult a business attorney.
After drafting the partnership agreement, determine whether you are going to draft a “statement of partnership,” for a general partnership, or a “certificate of limited partnership” for a limited liability partnership. These documents will identify the partnership as existing within the state you selected. While neither the statement of partnership or the certificate of limited partnership are mandatory, they are recommended along with the partnership agreement.
Step Five: Employer Identification Number & Bank Account
Lastly, obtain an employer identification number (EIN) and open a business bank account. Doing so will allow you to begin separating business income taxes from your own personal income taxes. You should also be sure to check with the state you are registered in to determine if there are any permits or licenses needed to run your business.
Getting Legal Help
Once you have completed all the steps above, you will be well on your way to operating a successful partnership. If at any point you have questions or other issues to resolve in setting up your partnership, do not hesitate to contact an experienced business attorney.