So you want to form a partnership for your business. You’re sure about this even after reading the plusses and minuses of this business format. (Hint: We don’t like partnerships for small businesses. We think LLCs or S corporations are better.)
Not a problem. Here’s our step-by-step guide on the mechanics of forming a partnership.
General Partnerships vs. Limited Partnerships
There are two basic types of partnerships: the general partnership and the limited partnership. It’s easy to form a general partnership. It’s a lot more complicated to form a limited partnership.
How to Form a General Partnership
The general partnership is the easiest way to form a partnership. With a general partnership, all you and your partner(s) have to do is to agree that you’ll go into business together and then actually start doing business together.
If you’re in the US, each state has default laws on how to form and run a general partnership. Usually, you don’t have to file any documents with your state. By default, a generic partnership is a general partnership.
As a general partnership, you and your partners share profits, losses, and liability equally. If a partner wishes to leave, then the partnership ends. You owe each other a fiduciary duty, which means you have to put the partnership’s business interests above your personal business interests. This is a high bar to keep up.
The default partnership laws can be an inconvenient way to run a business. Many people who start a partnership don’t even know what’s in those laws. Usually, partnerships get around a lot of the default laws by having a partnership agreement (sometimes called a partnership operating agreement).
The partnership agreement defines, for instance, how you can take on new partners or how the partnership can continue to exist if a partner leaves. The agreement should be tailored to your business’s needs, so it is best to hire a lawyer to draft the agreement.
If you want to form a partnership, we highly recommend that you have a partnership agreement.
How to Form a Limited Partnership
A limited partnership has at least one general partner and at least one limited partner. The general partner runs the partnership and is responsible for the liabilities and debts of the partnership. The limited partner is just a silent investor whose liability is limited to the amount they invested.
To form a limited partnership, you have to have an operating agreement. You also have to file a certificate of formation with your state. Typically, the certificate is filed with the state’s Office of the Secretary of State.
Often, the general partner of a limited partnership is a corporation, so you’ll need to form that too. The paperwork can get complicated, so it is best if you get a lawyer’s help.
Limited partnerships are often used by large corporations that want to form joint ventures with other businesses. They often don’t qualify as an LLC or S corporation, so they use a partnership to get the tax breaks they want.
In other words, sophisticated businesses form partnerships for very specific reasons to deal with very specific issues. Small businesses usually don’t have these reasons/issues. Instead, it’s far more straightforward for a small business to run as an LLC or an S corp.
File an Assumed Name Certificate
By default, partnerships are named after the last names of all their partners. If you want to call your business by another name, you’ll need to file an assumed name certificate. Where—i.e. with which government agency—you have to file depends on which state you live in.
For instance, in Texas, the Secretary of State’s website shows a list of entities that must file their assumed name certificate with them. If your type of entity is not on that list, then you’ll have to file the certificate in the county where you do business. The limited partnership is on that list, but a general partnership is not.
So, if you form a limited partnership in Texas and want to use a trade name, then you file the assumed name certificate with the Texas Secretary of State. If you form a general partnership and want to use a trade name, then you file the certificate with the county clerk’s office in the county where you plan to do business.
This rule is different for each state, so be sure to do an internet search to find out the correct rule for your state. Typically, searching “assumed name certificate” plus the name of your state will get you to the correct website.
Get a Taxpayer ID Number (EIN)
With a partnership, in the US, you’ll need a taxpayer ID number from the IRS. You’ll need this to hire employees or work with contractors. You can do this very easily yourself and for free by filling out the form on the IRS website.
Open a Bank Account for the Partnership
Lastly, once you have your business name and your taxpayer ID, you can open a bank account under the partnership’s name. The specific steps and the documentation needed (e.g. assumed name certificate) are different for each bank, but your bank will help you through the process.
How to Sign Documents for the Partnership
In a limited partnership, only the general partner can sign documents. A general partnership only has general partners, so any partner can sign.
A typical signature block looks like:
[Signature]
Aspen A. Shepherd
General Partner
Shepherd, Corgi, and Kitten, GP (or LP if limited partnership)
d/b/a Kibbles Shack
It’s Easy to Form a Partnership, so Make Sure You Don’t Accidentally Get into One
Forming a general partnership is almost as easy as forming a sole proprietorship. You may not even have to file any paperwork with your state. All you have to do is call someone a partner and start working together in a business endeavor.
While there are advantages in doing business as a partnership, some of the default laws can cause problems in the future. You can get around the defaults by having a partnership agreement, but by the time you have a decent one drafted by a lawyer, you’ll have spent at least as much time and money as you would had you formed an LLC or a corporation.
So, our advice is to just go ahead and form the LLC and corporation instead.
DISCLAIMER: This article does not constitute legal advice. Instead, it contains general information. The information gives you the background you’ll need to hit the ground running when you do go get advice from a lawyer. Only lawyers properly licensed in your state/country are qualified to give you legal advice.
Questions? Comments?
