Forming A Partnership For A Business Enterprise
A partnership is one of the oldest and simplest ways to start a business with one or more people. It can be a smart choice when two or more individuals want to combine resources, skills, or capital to run a business together. While easy to set up, partnerships come with unique benefits and risks, and they differ significantly from corporations, LLCs, and sole proprietorships. Here’s what you need to know.
What Is a Partnership?
A partnership is a business structure where two or more individuals agree to share ownership of a business. Profits, losses, and responsibilities are typically divided among partners according to the terms of a partnership agreement, though in the absence of one, state laws apply by default.
There are several types of partnerships:
- General Partnership (GP): All partners share management duties and personal liability.
- Limited Partnership (LP): One or more partners have limited liability but typically don’t manage the business.
- Limited Liability Partnership (LLP): Common among professionals like lawyers and accountants, it limits personal liability for certain partners.
How Partnerships Differ from Other Business Structures
Partnerships Compared to Sole Proprietorships:
A sole proprietorship is owned and operated by one individual. It’s the simplest structure, but the owner bears 100% of the liability. A partnership is just as simple to start but spreads responsibilities, decision-making, and risk across multiple people.
Partnerships Compared to LLCs:
An LLC (Limited Liability Company) offers limited personal liability protection to its owners (called members). LLCs are more formal than partnerships, requiring state registration, operating agreements, and ongoing compliance. Partnerships don’t require formal state filings (except for an LLP), but they do not shield partners from liability unless structured carefully.
Partnerships Compared to Corporations:
Corporations are legal entities separate from their owners (shareholders). They offer the strongest liability protection but require the most paperwork: articles of incorporation, bylaws, a board of directors, and regular reports. Partnerships, on the other hand, are easier to set up and manage but expose partners to personal liability unless limited by structure.
How to Form a Partnership
- Choose Your Partners Wisely
Trust, reliability, and a shared vision are crucial. Unlike shareholders in a corporation, partners are directly responsible for daily operations and debts. - Create a Partnership Agreement
While not legally required in many states, a written agreement is essential. It should outline:- Ownership percentages
- Profit and loss distribution
- Roles and responsibilities
- Dispute resolution
- Exit or buyout procedures
- Register Your Partnership Name
If you’re using a name other than the legal names of the partners, you may need to register a “Doing Business As” (DBA) with your state or county. - Obtain Licenses and an EIN Depending on your industry and location, you may need business licenses or permits. You should also apply for an Employer Identification Number (EIN) with the IRS for tax purposes.
- Comply with Taxes and Legal Obligations
Partnerships typically file an informational tax return (Form 1065), while profits and losses pass through to partners’ personal tax returns. Partners pay self-employment taxes, unlike corporate shareholders.
Conclusion
A partnership can be fast, affordable, and effective—especially if you and your co-founders trust each other and are aligned on goals. Just be aware that partnerships offer less legal protection than LLCs or corporations and require strong internal agreements to avoid future disputes. With proper planning, a partnership can be a flexible and powerful way to grow a business.