How To Form a Partnership
Forming a partnership involves several steps. Here is a generalized process, but keep in mind that the specifics can vary depending on your location and the nature of your business:
- Find a Partner: The first step in forming a partnership is finding someone with whom you want to go into business. This could be someone who complements your skills or who shares your business vision.
- Choose a Name: Once you have a partner, you’ll need to choose a name for your partnership. Depending on the laws in your area, you might need to include certain words or phrases in your name to indicate that your business is a partnership.
- Draft a Partnership Agreement: A partnership agreement is crucial. It should detail how profits and losses will be divided, what happens if a partner wants to leave the business, how decisions will be made, and so on. It’s generally a good idea to have a lawyer help with this to ensure all bases are covered.
- Register Your Partnership: If required by your local jurisdiction, you will need to register your partnership with the appropriate government body, often the Secretary of State’s office. This will likely involve filling out some paperwork and paying a fee.
- Obtain Necessary Licenses and Permits: Depending on the nature of your business, you may need certain licenses or permits to operate. These could be local, state, or federal licenses or permits.
- Get an Employer Identification Number (EIN): Most partnerships will need to get an EIN from the U.S. Internal Revenue Service (if the business is based in the United States). This is used for tax purposes.
- Set Up Financials: Set up a separate bank account for your partnership to keep personal and business finances separate. This can help when it comes time to do taxes or if your business is audited.
- Buy Insurance: Depending on your business and location, you may need certain types of insurance. Common types of business insurance include general liability insurance, professional liability insurance, and property insurance.
Remember, it’s important to consult with a business attorney or advisor to understand all the legal and financial implications of starting a partnership in your specific location and industry.
Example of How To Form a Partnership
Suppose Alice and Bob are both software developers who have decided to start a mobile app development business together. Here are the steps they would take to form their partnership:
- Find a Partner: Alice and Bob have decided to partner because they have complementary skills in app design and backend development.
- Choose a Name: They decide to name their business “Innovative Apps Partnership.”
- Draft a Partnership Agreement: Alice and Bob hire a lawyer to help them draft a partnership agreement. The agreement outlines how profits and losses will be split, the roles and responsibilities of each partner, how decisions will be made, and what will happen if one of them decides to leave the business.
- Register the Partnership: They register “Innovative Apps Partnership” with the Secretary of State in their state. They fill out the necessary paperwork and pay the registration fee.
- Obtain Necessary Licenses and Permits: Since they are starting a software business, they research and apply for any necessary licenses and permits their local, state, and federal governments require for this type of business.
- Get an EIN: Alice and Bob apply for an Employer Identification Number (EIN) from the U.S. Internal Revenue Service (IRS). They’ll use this number for tax purposes.
- Set Up Financials: Alice and Bob open a separate bank account for “Innovative Apps Partnership” to manage their business finances separately from their personal finances. They also set up a bookkeeping system to track income, expenses, assets, and liabilities.
- Buy Insurance: They buy business insurance that covers general liability and professional liability, ensuring they’re protected in case of any business-related incidents or lawsuits.
Following these steps, Alice and Bob have now established a legal business partnership. They can start developing mobile apps together under their newly formed company, “Innovative Apps Partnership.” Keep in mind that this is a simplified example and actual requirements and steps may vary depending on specific local laws and the nature of the business.