1. Partnership Agreements
2. Open and Ongoing Communication
3. General Partnerships
4. Limited Partnerships
5. How Much Does It Cost to Enter Into a Partnership?

What do you need to start a partnership? Depending on the type of business and location, specific requirements may vary but usually include the following:

  • Choosing and registering your business name
  • Creating a signed partnership agreement
  • Registering your partnership
  • Obtaining licenses and permits

A business partnership has several owners who share the daily tasks of running a business as well as in the profits and losses. Sometimes business partners start businesses together with only a few ground rules and little planning. Eventually, they discover that what's left unplanned can lead to unmet expectations.

Partnership Agreements

A business partnership has several owners who share the daily tasks of running a business as well as in the profits and losses. Sometimes business partners start businesses together with only a few ground rules and little planning. Eventually, they discover that what's left unplanned can lead to unmet expectations.

Partnership agreements stipulate each partner's financial stake in the operation and how a business is managed. For instance, if you and your partner sign an agreement to a 50/50 split of all profits, you may have little to no recourse if your partner only ends up doing 20 percent of the work. That's why it's important that people engaged in a partnership clearly define what each person expects in terms of profits and ownership and what each person contributes.

Open and Ongoing Communication

Business partners often make the mistake of signing a business agreement before really getting to know one another. Clearly, partners must be able to communicate openly and feel comfortable expressing opinions, expectations, and ideas.

A few questions you may want to ask each other prior to signing an agreement include:

  • Do you and your partner share both professional and personal values, goals, and ideas?
  • Are your partner's character and motivations trustworthy?
  • In what areas of business or in everyday life do you agree or disagree?

The following points should also be considered:

  • How will you handle it if your spouse or child decides to join the business?
  • How will it be worked out if one partner is dishonest?
  • What if you or your partner decides to move to another state or out of the country?

Partnerships that succeed have learned to set boundaries to keep business matters from dominating every aspect of their lives.

General Partnerships

The easiest and least expensive way to start a business with someone else is to establish a general partnership. Unlike a corporation, where you must file in your state, there are no formal or legal steps required in forming a partnership.

Perhaps the biggest drawback of a general partnership is that all partners are mutually liable for all business obligations and debts. “A creditor can sue a single partner for all of the partnership debt owed, and this partner is responsible for paying the full amount to the creditor,” Barbara Weltman, a premier consultant for small businesses, explains.

Limited Partnerships

A business partnership that is made up of at least one limited partner and one general partner is called a limited partnership. It is different from a limited liability partnership or a general partnership in that an LLP shields all partners from negligence or wrongful acts by other partners. Also, all profits from the business are distributed among the partners, who then include the income they receive in their personal tax returns.

You can form a limited partnership by developing a formal agreement and filing of documents with the office of your Secretary of State. In a few states, you may also be required to submit a “notice of formation” to be published in your local newspaper.

How Much Does It Cost to Enter Into a Partnership?

The average cost for an attorney to draft a partnership agreement can vary greatly — from $500 to $2,000 — depending on a variety of factors, including location, the complexity of the partnership arrangement, and experience of the lawyer.

Most often, partners will establish equal ownership of the partnership, each contributing 50 percent of the initial investment. Then, as the partnership grows and evolve, compensation will be adjusted accordingly.

Besides obtaining a federal employer identification number (EIN), opening a bank account, choosing a name, etc., here is a quick list of other regulatory and legal tasks that will need to be completed as you begin your partnership:

  • Register for sales taxes with your state taxing authority.
  • Register with the EFTPS payment system to pay federal taxes.
  • File a fictitious name, often called a DBA or "doing business as" with your city or county.

Every partnership will have specific needs and expectations and will want to achieve these desires in a way that works best for all concerned. A lot of work and careful management goes into starting and maintaining a mutually successful partnership. However, when done well, great partnerships can deliver results that may be impossible otherwise.

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