Forming a partnership

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The Nature of a Partnership

A partnership is a business arrangement in which two or more people own an entity, and
personally share in its profits, losses, and risks. The exact form of partnership used can
give some protection to the partners. A partnership can be formed by a verbal agreement,
with no documentation of the arrangement at all.

The Partnership Agreement

When a verbal partnership agreement is used, there may be subsequent disagreements
among the owners at a later date regarding what was originally agreed to. Consequently, it
makes sense to create a written document that states how certain situations are to be
handled. This partnership agreement should at least cover the following topics:

The rights and responsibilities of each partner

Whether partners are designated as general partners or limited partners, since this
impacts their responsibility for the liabilities of the partnership

The proportions of partnership gains and losses to be apportioned to each partner

Procedures related to the withdrawal of funds from the partnership, as well as any
limitations on these withdrawals

How key decisions are to be resolved

Provisions regarding how to add and terminate partners

What happens to partnership interests if a partner dies

What steps to follow to dissolve the partnership

The proportions of residual cash paid out to the partners in a liquidation

Additional Partnership Formation Activities

In addition to the partnership agreement, the partners must engage in a number of other
formation activities that are common to all types of businesses. These actions include:

Register the business name

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Obtain an employer identification number

Obtain any licenses required by governments where the partnership plans to operate,
such as a sales tax license

Open a bank account in the name of the partnership

File an annual informational return with the Internal Revenue Service

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