How to Create a Partnership

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A partnership is a business co-owned by two or more people who haven't filed with the state to become a limited liability company or a corporation. All the owners contribute to the business, whether through financing or sweat equity. The owners report the partnership's profits as personal income on their tax returns.

Type of Partnership

A general partnership is the simplest form. All partners share responsibility for running the business, though they may divide up tasks. They also share in the profits or losses and — if the partnership is sued — in the legal liability. A limited partnership allows some of the partners to have a lesser involvement in the day to day operations, and reduced liability as well. A joint venture is a type of partnership only used for short-term projects.

Choosing Your Partners

Like any team, a partnership requires you select right mix of players to succeed:

•How many partners do you want to work with? Inc. Magazine says that while having more than 10 partners is legal, it's also unwieldy to manage.

•What does each partner bring to the table? A partnership can be, for example, three doctors working together, each contributing similar capital and skills to the practice. Alternatively one partner could run the business side, one handle the medical services,and one puts up most of the money, possibly as a limited partner.

•What return does each partner expect? Partners can share everything equally or divide up profits based on how much capital each contributes. However, you can also agree that if one partner does most of the firm's work, that might make up for a smaller capital contribution.

The Partnership Agreement

You can start a partnership without any sort of paperwork — just agree that you're partners and it's a go. However that leaves you open to misunderstandings about who does the work, how the profits will be shared or who can make management decisions. A partnership agreement ensures that you're on the same page. Without an agreement, the way you run your business has to default to your state's business law.

A good agreement covers several issues:

•What each partner contributes to the company, and how much of an ownership share each receives.

•How to make decisions. You can, for example, choose majority vote, require unanimous agreement or allow each partner to make some decisions unilaterally.

•Whether any partner can bind the entire firm to a contract or commitment, or whether that authority is limited.

•How profits are shared. It's not just about how much each partner gets, but when they are distributed. For example, you may be able to draw on your share during the year, or you may be forced to wait to take a distribution at year's end.

•The procedure for letting new partners join, and what happens if one partner dies or wants out.

Naming Your Business

You and your partners have to pick a business name. It can be something as simple as your names — Smith and Jones or Jones, Smith, Robinson & Quill, for example. You also can opt for a fictitious name, in which case you have to register it with either the state or local government, depending on the law in your state.

If you want a fictitious name — a DBA or "doing business as" — do research first. Find out if another business already uses the name. Look up the name in the federal trademark database to ensure it isn't trademarked. Research whether it's available as a domain name. If all the signals are green, you can use it.

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