How to Start a Limited Partnership
Limited partnerships are an excellent business structure for people with business ideas that need starting capital from other investors. You'll want to learn how to write a partnership agreement, a certificate of partnership and how to file the necessary forms with the state and IRS to run a legitimate business.
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Things You'll Need
- computer with internet access and a printer
- about $100-$200 for filing fees (varies by state)
- a business idea and business partners
- about $100-$200 for a lawyer to review your partnership agreement (not required, but recommended)
- plenty of time to start your business right
Instructions
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Have an idea for a business. Your idea is not set in stone and it will probably change and evolve throughout the life of your business. It is important, however, to have at least one specific main purpose of your business when starting out. This principal business activity must be clearly stated at several stages when you form a limited partnership.
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Decide that a limited partnership is the best structure for your business. You can learn more about the available business structures at IRS.gov and SBA.gov. They include sole proprietorship, partnership, corporation, S corporation and limited liability company. The limited partnership structure is ideal if you want to run the business, but want other people to invest some of the start-up capital. Limited partnerships have one or more general partners and one or more limited partners. The limited partners have limited control of the business operations, but are only liable for up to the amount that they contributed. The general partner has near full control of the business, but also has near full liability for the partnership's debt.
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Find partners. This could be easy or difficult. The easiest way is to have friends, family and acquaintances who who are interested in your business idea and want to invest. You are entering a legally binding agreement with these people and your profits and good fortune will be tied to theirs so it is important to form your partnership with people that you trust. If you can't find partners in the people that you know and trust, go meet new people and tell them about your plans and ideas. If your plan is good, finding the capital should be possible. Alternatively and probably much harder, you can access the venture capital markets and convince these wealthy people who routinely invest in start ups to be your limited partners.
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Write a partnership agreement. This is the most important step. The partnership agreement is the actual legally binding document between you and your partners. You might think this is a job for an attorney, but you don't need legal advice to write a sound partnership agreement. Writing a limited partnership agreement is just like writing any contract. As long as you address the key elements that should be in a partnership agreement and lay out terms of the business in clear language, it will be a good agreement. Beyond that, you can add any additional terms to the contract as you like. This is a legal document, so be thorough and concise. Write an agreement that would specifically detail the partnership's policies on any matter that would commonly arise in court. If you're not comfortable writing it by yourself, you can find an attorney to write a partnership agreement for you or have him review your agreement after you've written it.
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There are certain key subjects you must include when forming a limited partnership. You can form whatever rules you want for your partnership as long as all the following issues are addressed fully. Essentially it comes down to this: who you all are; what you're agreeing to do; the agreements about how the money is to be contributed and eventually paid out; who is liable for what; and what are the terms for how the partnership will eventually end. Those are the things that you absolutely must clearly define. Anything else you add are extra clauses for your specific situation.
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Register your partnership's name with the state. Each state will have a different procedure for this step. Find your state's website and follow the instructions for reserving a name for your business. There is probably a small fee associated with this filing.
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Register an Employer Identification Number, EIN, with the IRS. The EIN is your business' tax ID for the IRS. You can apply for an EIN online at IRS.gov, where there are easy instructions for getting your EIN through the mail.
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Write a certificate of partnership. The certificate of partnership is a filing with your state. It is required to clearly state some basic information that the state keeps on file for every business. The certificate of partnership is different from the partnership agreement, which is a contract among partners. Each state has very specific instructions regarding the content of the certificate of partnership. These instructions are clearly explained in the state's statutes. Search for state statutes and then once you find them, you must locate the chapter that deals specifically with limited partnerships. Read that entire section and its specific instructions. Compose a document that fulfills the requirements set forth in that statute and follow the appropriate process to file it with your state. There will probably be a filing fee associated with this step.
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Again, you must consult your specific state's statutes regarding the necessary information on the certificate of partnership filing. If you do not have all the required elements for your state, the form will not be accepted. Generally, what's needed includes: name of partnership; name and address of initial designated office and initial agent for service of process; name and address of general partner; whether or not the partnership is a limited liability partnership; primary business activity; and date of termination. Send in your certificate of partnership and the filing fee and wait for your state to declare you an official business entity. Now that your business is formed you only need to do a little paperwork once a year to remain in good standing.
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File a tax return and other yearly forms to maintain the good standing of your business. Limited partnerships are taxed by pass through taxation. That means that the business itself pays no taxes, but each year every partner will pay their share of the business' taxes. You must file a tax form 1065 with the IRS every year declaring the partnership's income. It is worth it to read the entire instruction manual for form 1065 the first year that you file. You must also send out 1065 schedule Ks to all of your partners informing them of what taxes they owe. You will also probably have to file a yearly form with your state that lets them know that you're still an active business and updates them of any changes to your certificate of partnership.
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Tips & Warnings
Read examples of a partnership agreement online. Read your state's free online resources for how to start a business if they're available. Read your state's statutes on limited partnership and read IRS form 1065. The partnership agreement is a contract and is by far the most important document. If you file a form incorrectly, you can just do it again and pay another fee. If you write your partnership agreement incorrectly, it has serious legal implications.
Consult with a lawyer to review your partnership agreement if you feel the least bit of uncertainty about doing it on your own.
