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How to Start a Small Business Partnership

by Contributing Writer
  • Overview

    Entrepreneurs who start a small business frequently structure the business as a partnership. A partnership structure provides business owners with several advantages that are not available to owners of large corporations. The most important features of a partnership include the ease of formation, the avoidance of tax at the partnership level and a well-established set of partnership laws, which makes it easier to settle any disputes that may arise.
 
  • Step 1

    Draft a partnership agreement between you and the partners with whom you are starting the company. The partnership agreement should spell out the responsibilities of each partner, the amount of capital each partner is investing in the partnership and each partner's level of ownership. The partnership agreement should also address compensation, and it should include an exit clause that describes what happens to the partnership if one partner decides to leave. In the absence of such a clause, the partnership will automatically dissolve if one of the partners decides to pull out.
  • Step 2

    Contact the Secretary of State for the state in which you will incorporate your partnership to request the necessary forms. At a minimum, you will need to file a Certificate of Incorporation with the Secretary of State, and you will likely have to pay a fee. There may also be other forms to fill out, which vary by state. A lawyer can assist you in obtaining and filling out the necessary forms.
  • Step 3

    File IRS Form 990 with the Internal Revenue Service. Form 990 is a form that tax-exempt corporations are required to complete. You must complete Form 990 within two months and 15 days of incorporating with the Secretary of State. Be sure to enter your Employer Identification Number, which you will receive from the Secretary of State, on Form 990.
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  • IRS Form 990
  • IRS Form 990
  • Your partnership agreement should spell out the exact type of partnership you are forming. A general partnership is one that has unlimited liability for the various partners (that is, the partners can be held personally responsible for the debts of the partnership). A limited liability partnership has limited personal liability for the partners. For this reason, most partnerships are structured as limited liability partnerships.
  • Your partnership agreement should spell out the exact type of partnership you are forming. A general partnership is one that has unlimited liability for the various partners (that is, the partners can be held personally responsible for the debts of the partnership). A limited liability partnership has limited
  • personal liability for the partners. For this reason, most partnerships are structured as limited liability partnerships.
  • Make sure that you and your partners claim your individual shares in the profits, losses and deductions of your partnership on your personal tax statements. The partnership is tax-exempt at the partnership level, but the profits and losses of the partnership are passed through to the individual partners, who must claim those items on their personal tax returns.
  • Make sure that you and your partners claim your individual shares in the profits, losses and deductions of your partnership on your personal tax statements. The partnership is tax-exempt at the partnership level, but the profits and losses of the partnership are passed through to the individual partners, who must claim those items on their personal tax returns.

References & Resources