What is a partnership?
A partnership is a formal agreement between two or more partners who agree to work together towards a mutual goal. A partnership can be formed between specific people, businesses, organizations, schools, governments, or a combination of a few.
The goal of creating a partnership with another party is to fill the skill or monetary gaps in order to achieve a shared goal. When people or organizations work together they can accomplish more than their individual efforts. Most business partnerships have a financial element, which helps a business without capital get up and running.
Forming a partnership
Step 1: Choose what kind of partnership you want. There are many decisions that go into creating a partnership. You’ll want to think about the roles, responsibilities and payments of each partner that joins your partnership.
Partner contributors. Decide how much each partner will contribute when they join. Think about how much founding partners will contribute verse new partners later down the road.
Partner types. Choose what kind of partners you want to work with. What responsibilities will each partner have? Which partners can make major decisions and which partners contribute less in the decision making process? In a business partnership you’ll most likely have financial partners that share ownership (equity partner), while other partners are paid (salary partner.)
Partner shares. How will each partner benefit from joining your partnership? Decide how the profit is divided amongst partners, taking into account seniority and responsibility. When you take the total earnings and divide them amongst the partners, you’ll get the distributive share.
Step 2: Choose a partnership type. When it comes to partnership there are 4 relatively common types of partnerships:
General partnership. A general partnership is when each partner is actively involved, equally sharing the work, liability, and profits.
Limited partnership. A limited partnership allows investors to buy into a business, but each partner has limited liability and profit.
Limited liability partnership. A limited liability partnership is when all partners have limited liability towards the business, so partners are not responsible for negligence.
Joint partnership. A joint partnerships involves bringing together partners for a specific project. If the project is successful, partners may want to create a general partnership.
Step 3: Name your business. In order to have a partnership, you need a business. Choosing a name is a necessary step in creating your own business. Next you can also consider creating a website for your business.
Step 4: Register your partnership online. When you know you partnership info and business name, look for the business or corporation section of your state’s Secretary of State website. This is where you register your business as a partnership.
You’ll need to register your partnership in each state you plan to do business. You’ll register your main state first as a "domestic" partnership, followed by other states known as a "foreign" partnership.
Step 5: Get an employer ID. Once you register your business name, type and location you can get an employer ID number (EIN) from the IRS. Most businesses need an EIN number even if you don’t have employees. You can get an employer ID number by applying for an EIN online.
Step 6: Create a partnership agreement. Your partnership agreement documents all the processes and decisions your partners have agreed on. It’s important in understanding how your partnership answers important questions that will come up in the future.
Step 7: Get registrations, licenses and permits. There are a few more legal requirements you’ll need to register your business partnership for before you get started:
License and permits
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Types of partners in a partnership
Once you know what kind of partnership you want, here are the different kinds of partners that would join and their responsibilities.
General partners. A general partner joins to form the basis of your business and there needs to be at least 2. They’ll be responsible for the way the business works both logistically and legally.
Limited partners. A limited partner receives less profit and is legally responsible only for their investment.
Equity partners. An equity partner has a financial stake in the business and a personal interest in moving the business forward. If the company stops growing, an equity partner may need to invest more money to achieve financial security.
Salaried partners. A salaried partner owns a section of the company and also works for the company on a regular salary.