How to Set Up a Business Partnership

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parts

1Preparing to Form the Partnership

2Creating the Partnership Agreement

3Setting up Your Business

Other Sections

Tips and Warnings

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References

A partnership is a business in which two or more people share ownership. To set up the partnership, you need to create a partnership agreement and get necessary licenses and permits from the state. But you first need to give serious thought to your choice of partner and the type of partnership you want to form.

Steps

Part 1

Part 1 of 3:

Preparing to Form the Partnership

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   Decide if you need a partner. You might actually be better off starting a business on your own. If you need help, then you could hire someone to work for you part-time or as an independent contractor. Partnerships don’t always go along smoothly, and you shouldn’t jump into a partnership unless you are prepared to work closely with another person.

   • It makes sense to form a partnership when the success of the venture depends on having the other person’s participation. For example, the partner may bring needed skills, capital, or network connections to the partnership that are essential for the partnership’s success.
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   Interview potential partners. If you don’t know the other partner well, you should try to find out as much about them as possible. You want to figure out how well you will be able to work together. Ideally, you and any partners will have complementary skills. For example, you might be good at finances and legal issues, while the other partner excels at product development and marketing.

   • You can also consider taking a weekend retreat together. The purpose of the retreat is to allow you and your prospective partner to discuss the expectations you each have. Be sure to discuss what you expect in a partner as well as where you see the business going.
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   See how well you work together with your partner. You might be forming a partnership with someone you have worked with before. In that situation, you probably have a good idea of your partner’s communication style.

   • However, if you haven’t worked together before, then see if you can work on a project with each other before forming the partnership. It doesn’t have to be anything large. But you could work as independent contractors for another company on the project. At the end, you will have a better sense of whether you two are effective team members.
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   Meet with an attorney. Forming a partnership raises a host of legal issues. A qualified attorney can help you solve problems and provide advice. The attorney can also help you draft the partnership agreement or at least look over the agreement if you draft it yourself.

   • To find a qualified attorney, you can visit your state’s bar association. These organizations often have referral services which you can use.
   • You might also want to meet with an accountant. An accountant can advise you on tax issues. To find a competent accountant, you can ask your lawyer for recommendations.
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   Settle on a partnership form. There are generally three types of partnerships, each with their own risks. You should discuss with your partner and your attorney which partnership form is best for you.

   • General partnerships. Partners share equally in profits, management, and liabilities. If you want to deviate from this default, then you need to assign different percentages in the partnership agreement.
   • Limited liability partnerships (LLPs). Under this arrangement, partners are personally shielded from the partnership’s liability. Partners may also have limited input in partnership decisions or be short-term investors in the partnership.
   • Joint ventures. A short-term partnership, e.g., two people working on a single project or for a limited amount of time.
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Part 2

Part 2 of 3:

Creating the Partnership Agreement

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   Identify the business. You should begin the Partnership Agreement by opening a blank word processing document and then labeling the document “Partnership Agreement” at the top of the page. You then want to identify the essential components of the partnership: the partners, the type of partnership you are forming, and the partnership’s name and location.

   • Identifying the partnership includes naming all of the partners and their places of residence. Then state that the partners agree to the substance of the partnership agreement: “The Partners agree as follows:”
   • Also explain what type of business the partnership will be engaged in. For example, “The partners voluntarily associate themselves as partners to perform the general business of [insert business, e.g., “provide legal services” or “perform accountancy services”] and any other type of business from time to time as agreed to by the Partners.”
   • Be sure to include a statement naming the partnership and its principal place of business.
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   State each partner’s capital contribution. In a general partnership, it is assumed that each partner will contribute an equal amount of start-up capital to the partnership. However, if partners contribute an unequal amount, then you should identify the amount contributed by each as well as the type of capital contributed (whether cash or property).

   • Include language like the following: “Each partner shall contribute to the Partnership an initial contribution of capital.” Then list each partner and specify how he or she will make the contribution. For example: “Margaret Wesson: Capital contribution shall consist of cash in the amount of $25,000.”
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   Identify other partnership property. Any property the partners contribute to the partnership becomes the property of the partnership. Also, any property purchased by the partnership belongs to the partnership as well. You should identify any exceptions in your partnership agreement, in case partners want to retain title to their property.

   • For example, you would state: “It is agreed that the 2014 Toyota Camry is being made available to the partnership by Ethan Smith solely for the use of the partnership and that it is to remain the property of the lender. It shall be returned on January 1, 2018 or when the partnership is dissolved, if prior to that date.”
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   Decide how to divide profits and losses. You can divide profit and losses however you want. For example, you might divide them equally. Or you could divide them in proportion to each partner’s capital contribution. Because this is a key element of the partnership, you should come to an agreement with the other partners before drafting this section of the partnership agreement.

   • You should list the partners along with their ownership percentage. Then you can explain that profits will be distributed based on this percentage: “Generally, gross cash distribution will be made in proportion to Partners’ percentages of partnership interest. Operating expenses will also be shared generally at the time those expenses are realized in proportion to Partners’ percentages of partnership interest.”
   • Also be sure to explain how profits will be distributed. You might distribute only once a year or you could allow partners to make periodic withdrawals. If you allow periodic draws, then be sure to specify how much each partner may withdraw at one time. For example: “Unless and until modified by the unanimous written consent of the partners, [list partners who can withdraw] will be entitled to a monthly draw of $_____.”
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   Outline how business decisions are made. This is another key part of the agreement. During the normal course of business, countless decisions will have to be made. For example, you may end up buying office supplies for the partnership or purchasing online advertisements. The partnership agreement should identify the people who can make these decisions.

   • Also be sure to clarify who in the partnership has the power to bind the partnership in a contract. Generally, any partner can bind the entire partnership. However, you can change this default rule. For example, you may only want to authorize one partner to enter into contracts.
   • Alternately, you could give all partners the ability to form contracts provided the contract is not worth more than a certain amount. For any contract in excess of this amount, then you can specify that the partner needs the express written consent of all other partners.
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   Explain how a person can exit the business partnership. Partners end up leaving partnerships for a variety of reasons. For example, they may want to retire. Alternately, they might want to withdraw from the partnership in order to form a different partnership with someone else. Sometimes, partners also need to be expelled. Your agreement should explain the mechanisms for each.

   • You can provide for retirement or withdrawal by explaining what steps the partner must take, e.g., providing written notice by registered or certified mail to all of the other partners. Also stipulate how much advance notice the other partners must receive.
   • Explain the grounds for expelling a partner. The most common include the failure to make a required capital contribution, failure to fulfill an obligation under the agreement, mental disability, and legal insanity or incompetency.
   • Also explain the process for how the partnership can expel the member. For example, you could decide that the partners will take a vote. Explain whether the vote needs to be majority, unanimous, or some other percentage. Also explain how much notice the expelled partner will be given.
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   Provide instructions for dissolution. You must define under what situations the partnership can be dissolved. Generally, partnerships dissolve automatically on the death of one of the partners, but you can provide for the continued life of the partnership. Explain what triggers dissolution and what steps the partners need to take to keep the partnership going.

   • For example, many partnerships dissolve when a partner withdraws, retires, or is expelled; a partner dies or enters bankruptcy; a partner becomes incapacitated; or all partners unanimously agree to dissolve.
   • Explain what then happens when dissolution is triggered: “On dissolution, the remaining partners shall have the right to elect to continue business under the partnership name, by themselves, or with any new persons that they choose.” By including this language, you give yourself the option of continuing with the partnership as is. Be sure to state whether the vote must be unanimous, by majority, or by some other percentage.
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   State that the agreement is complete. All partnership agreements should have a “merger” clause. This clause explains that the document contains the entirety of the partners’ agreement. This clause helps pre-empt a partner from later claiming that there were oral agreements between the partners that were not included in the agreement but which should be enforced.

   • A typical merger clause looks like this: “This Agreement contains the entire understanding of the parties hereto and may not be modified or amended except by a writing signed by the parties.”
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   Include a signature block. All of the partners must sign their names and write the date. You should also have the partnership agreement notarized.
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Part 3

Part 3 of 3:

Setting up Your Business

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   Register your partnership name. You need to register a DBA (“Doing Business As”) name with your state if it differs from the partnership’s legal name. For a partnership, the legal name is either the name listed in the partnership agreement or the last names of the partners.

   • For example, if the partnership is named Wesson & Peters, but you want to do business as “The Tax Guys,” then you need to register that name.
   • Contact your county clerk’s office and ask if you need to register the DBA at either the state or county level (or both).
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   File a certificate with the state. If you form a limited liability partnership, then you will probably need to file a “registration” or “certificate” with the Secretary of State’s office. By contrast, if you have a general partnership, then you might not have to file anything. Check with your lawyer.
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   Obtain necessary licenses and permits. Before you can legally run a business, you need to have the proper licenses and permits from your state or municipality. To find out what licenses or permits you need, you can use the Small Business Association’s Licensing and Permits tool at https://www.sba.gov/content/what-state-licenses-and-permits-does-your-business-need. Click on your state to find out what you need.
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   Get necessary bank accounts. You need to set up the partnership’s bank accounts. In order to do so, you will need to take the following documents to the bank:

   • The partnership’s Employer Identification Number (also called a “EIN” or “TIN”). You can get this number for free by contacting the Internal Revenue Service (IRS) at (800) 829-4933 or by visiting https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online.
   • A copy of your partnership agreement.
   • Your business certificate from the state, which shows the partnership’s name as well as the names of the individual partners.
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   Find real estate. Unless you are running a partnership from your home, you will need an office. You should think about the following when negotiating a commercial lease:

   • Try not to overcommit on the lease. You want to leave some flexibility. Specifically, you should avoid getting locked into a long lease; instead, a one or two year lease would be ideal.
   • Pay attention to extras not included in the rent. The landlord might charge you for utilities, maintenance fees, and upkeep for common areas. Ask about all “hidden fees” before signing a lease.
   • Ask whether the lease allows subleasing. Also check if there is an exclusivity clause that prevents the landlord from leasing to one of your competitors on the same premises. Both of these could be beneficial to you.
   • Figure out what happens in the event of default. Although it’s painful to consider, your business might not be successful. In that case, you may need to dissolve the partnership. Find out if you are obligated to continue to pay on the lease, or whether you can end the lease early by paying only one more month’s rent.
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Warnings

• You should be wary of forming a partnership with a family member or a close friend. Business arrangements often go awry, and you risk the relationship if the business partnership sours.
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