How to Start a Partnership Business
If you’re thinking about starting a partnership, you’ve come to the right place. This guide will help you determine which type of partnership structure is right for your business.
What is a Partnership?
When two or more people start transacting business without filing for an LLC, corporation, or other structure, they have a partnership by default. When only one person is running the business, it is a sole proprietorship.
If you are thinking of starting a partnership with someone, it is a good idea to consider a general partnership or limited partnership. Typically, limited partnerships are helpful when general partners are actively managing the business, while some are passive. If you are interested in a limited partnership, it is also worth determining if your state allows the creation of limited liability partnerships or limited liability limited partnerships.
In terms of forming a partnership, it is essential to take the time to gather the necessary paperwork. This could include filing with the Secretary of State, obtaining a business name, or signing a partnership agreement.
Choosing a Partnership Structure
There are four types of business partnerships. Let’s look at the similarities and differences between the types in terms of management, taxation, and legal liability.
|Type of Partnership||Management||Taxation||Legal Liability|
|General Partnership (GP)||Two or more owners (partners)||Pass-through entity, owners are expected to pay income tax||No personal liability protection, no protection from members' actions|
|Limited Partnership (LP)||Two or more owners (at least one limited and one general partner)||Pass-through entity, owners are expected to pay income tax||Limited partners have personal liability protection; general partners do not have limited liability|
|Limited Liability Partnership (LLP)||Two or more owners (partners)||Pass-through entity, owners are expected to pay income tax||All partners are protected from personal liability|
|Limited Liability Limited Partnership (LLLP)||Two or more owners (at least one limited and one general partner)||Pass-through entity, owners are expected to pay income tax||Limited partners have personal liability protection; general partners do not have limited liability|
How to Start a Partnership Business
When it comes to successfully forming a partnership of any kind, there are multiple steps owners must take.
- Choose a structure. Before anything, you need to determine which partnership structure is right for your business based on what's allowed in your state and your business's ultimate vision and goals. Consult with an attorney or accountant for personalized guidance to avoid unauthorized practice of law.
- Draft a partnership agreement. A partnership agreement establishes how the business will run, how you'll manage changes, and what happens with profits and losses.
- Name your business. Prior to filing any partnership-related paperwork with the Secretary of State, you need to ensure that the name you want to use is available and complies with state laws.
- Register your partnership. Registering your partnership involves choosing a home state, often referred to as the domicile, determining which licensing you'll need to conduct business, applying for the applicable partnership certificate, appointing a registered agent, and submitting your application.
- Submit annual reports. If your business is registered as an LP, LLP, or LLLP, it's likely you will need to submit yearly reports to the secretary of state to ensure they have the latest information.
State requirements for partnership businesses vary. It’s essential to understand the specific laws and regulations that apply to your situation. In addition, state laws often change, so it can be challenging to stay on top of your obligations. Below, you’ll find all of the information you need regarding partnerships throughout the United States.
Figuring out how to start a partnership business can seem overwhelming, especially at the start. Fortunately, Harbor Compliance has compliance software and professional services to help you oversee licenses, access documents, track renewals, and more.