If you and your friend have an idea that you may want to turn into an investment, a partnership might be the ideal business structure to select. But how do you start this business structure? Are you required to register it? Or, can you sign a partnership agreement and begin operations right away?
A partnership is an informal business structure owned and managed by two or more people. What’s great about this business structure is it allows you to pool funds to start the entity then share tasks and responsibilities.
All You Need to Know About Registering a Business Partnership
In this article, we will delve into registering a business partnership. You’re going to learn everything you need to know about forming a partnership, from the characteristics to the types to the process of registering.
Characteristics of a Business Partnership
Not a Separate Legal Entity
A partnership is not a separate entity from its owners. This business structure cannot act independently without the consent or involvement of the partners.
A partnership is incapable of entering into a contract or agreement on its own. It can also not own property, get into debts or hire an attorney under its name.
The owners of a partnership, also called partners, have unlimited liability. They are personally liable for the debts and liabilities of their entity. If the partnership defaults on a bank loan, the lender can claim the partner’s private assets.
The extent of liability, however, depends on the type of partnership. In a general partnership, all partners have unlimited liability. In a limited partnership, limited partners are not liable for the debts.
Ease of Forming and Dissolution
The process of forming and dissolving a partnership isn’t as complex as an LLC or a corporation. You don’t have to file articles of incorporation or organization. You also don’t need to create bylaws or an operating agreement. The requirements for forming this business structure are few. In fact, some states don’t require you to register some partnership types, for example, a general partnership.
The main advantage that comes with a partnership is you get to share roles and responsibilities with your partners. For example, you can be in charge of operations. One of your partners can handle marketing and customer support, while the other can tackle accounting and bookkeeping. It’s not easy to get burned out or stressed in a partnership.
Sharing of Profits and Losses
In partnership, every partner shares in the profits and losses of the business. The percentage that each one gets depends on the partnership agreement they had when starting the partnership. If there is no agreement, the partners should share the profits equally.
Difficult to Transfer Ownership
It’s not easy to transfer ownership in a partnership. You need to seek the approval of other partners. You also cannot oust or bring in new partners without the consent of the others.
No Double Taxation
Since a partnership is not a separate legal entity, the IRS taxes them at the personal income level. There is no double taxation. Partnerships get taxed through the pass-through taxation method, where every partner pays taxes on the income they receive from the entity.
What Types of Partnership Can You Register?
There are four main types of partnerships. Each has its distinguishing characteristic that varies from the rest. Let’s go over each type:
A general partnership is a partnership structure where all partners have unlimited liability. They are all general partners, meaning that they all handle the daily responsibilities of the entity and are all liable for the partnership’s debts.
This partnership structure is the most basic of them all. Most states don’t require you to register a general partnership. You and your partners can form this business structure by signing or agreeing to a partnership agreement.
You may, however, need to register for a DBA (Doing Business As) if you plan to use a fictitious name in your partnership. A fictitious name is a name that doesn’t include any surnames of the partners.
A limited partnership has two types of partners. There are general partners and limited partners. As mentioned above, general partners are responsible for the day-to-day running of the entity. Limited partners, by contrast, do not handle the daily tasks and are not liable to the debts and liabilities of the partnership. They are essentially silent partners or passive investors with limited liability.
Limited Liability Partnerships (LLPs)
A limited liability partnership is somewhat a hybrid of a general partnership and a limited partnership. In this business structure, every partner is a general partner. Each is, however, only liable for their actions or those of people under his supervision.
Some states don’t allow you to register a limited liability partnership. This partnership structure is, in most cases, limited to professionals like lawyers and doctors.
Master Limited Partnerships
A master limited partnership is a partnership that can be traded publicly on the stock exchange like a corporation. The IRS, however, taxes it at the personal income level like any other partnership.
This business structure has two classes of partners, general and limited partners. The general partners run the day-to-day activities, while the limited ones are the ones who invest in this business at the stock exchange.
Steps to Follow When Registering a Partnership
Before you start and register your partnership, take some time to choose your partners wisely. Your goal should be to select partners that share your vision and complement your skills. Once you cover this section, you can form and register your business partnership.
The steps highlighted below apply only for a limited partnership, limited liability partnership, and master limited partnership. For a general partnership, most states don’t require you to register. You only need to sign a partnership agreement and file for a DBA if you operate with a fictitious name.
Let’s explore the steps for forming a business partnership:
1. Choose a Name for Your Partnership
When selecting a name, you can creatively use the names of each partner or create a fictitious name. Whichever name you choose, you need to ensure that no other entity is using it to brand or conduct business.
Brainstorm with your partners on all possible names that best describe your business. Once you find the perfect one, use the name check tool on your secretary of state website to see if the business name is available. You can also do a quick internet search to check if any website, business, or social media profile operates under that name.
2. Select a State
It’s always advisable to register your partnership in the location where you conduct business. If you register in a different state, you’ll have to file for a foreign qualification and thus add extra costs to your registration.
If you conduct business in multiple states, you can register your business in one of the states where you operate. For the rest, you need to apply for a foreign qualification.
3. Draft a Partnership Deed or Agreement
Have a sit down with your partners and discuss everyone’s roles and contributions to the partnership. You can try asking the following questions:
- How much is each partner contributing financially?
- Who are the types of partners in our entity?
- Are there any limited partners?
- What are the roles and responsibilities of each partner?
- What share of profits or income does each partner receive?
Discussing these questions earlier on before registering your partnership will help you select the ideal partnership structure for your business. For example, if one of the partners wants to be a limited partner, you can register as a limited partnership, not a general one.
You can also use the information discussed to draft a partnership agreement. This document will help you define your relationships as partners. It will help you address any issues that may arise in the future, for example, what happens when one partner wants to leave the partnership.
Here are the details to include in the partnership agreement:
- Partnership’s name
- Contribution and ownership percentage for each partner
- Sharing of profits and losses
- Roles and responsibilities of each partner
- Process of withdrawing a partner
- Process of holding partnership meetings
- Process of voting and making decisions
- Process of bringing in a new partner
- Process of solving disputes
- Process of dissolving the partnership (if it comes to this)
4. Register With the State
Once you gather all the information about your partnership, head to the secretary of state’s website and register your entity. In most states, you can complete the registration online. The registration fees payable may vary from one state to another.
You need to select a registered agent when registering your partnership. This person will receive legal documents for your entity’s behalf, and it can be you or another partner in your entity. It can also be one of your employees or a registered agent service company you hire.
5. Obtain Other Regulatory Requirements
There might be other requirements that you need to meet when registering your partnership. It depends on the state and the nature of your business. Some states, for instance, may require you to obtain a business permit or a professional license for the products or services you offer.
For example, if you’re starting a construction partnership, you may need to obtain a zoning clearance and building permit from your state. It’s better to check with your state’s county government to ensure you comply with all the obligations and requirements for your business.
You need to also obtain an EIN from the IRS for tax reporting purposes. Getting this nine-digit number is free, and you can apply online on the IRS website. The IRS will issue you your EIN as soon they validate your partnership details.
A partnership is a business structure owned and controlled by two or more people. One notable advantage of forming this business structure is you’ll share tasks and responsibilities in running the entity. You also get to pool financial and intellectual resources when expanding the business or solving a problem.
There are four types of partnerships. They include general partnerships, limited partnerships, limited liability partnerships, and master limited partnerships.
Each type has unique characteristics that differentiate it from the others. Most states don’t require you to register a general partnership. All you need to do is create and sign a partnership agreement.
When registering a partnership, you need to select a business name first and then choose a state. It’s better to form your partnership in the state where you conduct your business operations. Next up, you need to create a partnership agreement and then register as a partnership with your state’s secretary of state. Don’t forget to obtain any other licenses and requirements for conducting business in your state.