How to Start a Limited Partnership

Difficulty: Challenging

Instructions

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

Step 1

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.
Step 2

Decide that a Limited Partnership is the best structure for your business. You can learn more about the available business structures at www.irs.gov and www.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. As a general partner, I recommend running the business in such a way that it has little or no debt, therefore lowering your liability.
Step 3

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.
Step 4

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 them review your agreement after you've written it. I used "A Guide to Starting a Small Business in Minnesota" as a key reference on what to include in the Partnership Agreement. Your state may have similar guides.
Step 5

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.

The name, duration, location, and principal activity of the partnership. Who the partners will be and who is a general partner and who is a limited partner and what their different roles will be. Procedures for additional partners in the future, if any. Initial capital contributions and how future contributions will occur if at all. How profits and losses will be shared. What type of distributions there will be, if any. How accounting will occur. What happens in the case of death of general or limited partners. Is a share in the partnership transferable. How the partnership agreement be changed in the future, i.e. by voting, written agreement only, etc.

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.
Step 6

Register your partnership's name with the state. Each state will have a different procedure for this step. Find your state's .gov website and follow their instructions for reserving a name for your business. In Minnesota it is through the Secretary of State. There is probably a small fee associated with this filing.
Step 7

Register an Employer Identification Number with the IRS. The EIN is your business' tax ID for the IRS. You can apply for an EIN online at www.irs.gov and they also have easy instructions for getting your EIN through the mail. The process is easy and excellent instructions are given on www.irs.gov.
Step 8

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. You can find these statutes on your state's .gov website. 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 which fulfills the requirements set forth in that statute and follow the appropriate process to file it with your state. There will probably be a larger filing fee associated with this step.
Step 9

Key elements of a Certificate of Partnership. Again, you must consult your specific state's statutes regarding the necessary information on the Certificate of Partnership filing. These are the required elements in the state of Minnesota. If you do not have all the required elements for your state, the form will not be accepted.

1. Name of partnership
2. Name and address of initial designated office and initial agent for service of process. (i.e. the first address of the business, and the first contact person)
3. Name and address of general partner
4. Whether or not the partnership is a limited liability partnership
5. Primary business activity
6. Date of termination

That was easy. 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.
Step 10

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 K's 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. Although not required, I also highly recommend writing an annual report of your business to be given to your partners because it's just good business.