Setting Up a Business Partnership in the United States

A business partnership is a legal relationship formed when two or more people agree to run a business together for profit. In the United States, partnerships are relatively easy to form and can be created through formal written agreements or even through the parties' conduct. There are several types of partnerships including general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs), each with different liability protections and legal requirements.

While not legally required in most states, a written partnership agreement is strongly recommended. Without one, your partnership will be governed by your state's default partnership laws, which may not align with your intentions. A written agreement allows you to customize important aspects like profit sharing, decision-making authority, dispute resolution, and exit strategies. Having these terms clearly documented helps prevent misunderstandings and provides a roadmap for handling various business situations.

A comprehensive partnership agreement should include: (1) Capital contributions of each partner; (2) Profit and loss allocation percentages; (3) Partners' authority and decision-making processes; (4) Management responsibilities; (5) Procedures for admitting new partners; (6) Withdrawal or death of a partner provisions; (7) Dispute resolution methods; (8) Business purpose and duration; (9) Distribution of assets upon dissolution; and (10) Non-compete and confidentiality clauses if applicable. Consider having an attorney review your agreement to ensure it addresses your specific business needs.

General partnerships (GPs) are the simplest form where all partners share management and have unlimited personal liability for business debts. Limited partnerships (LPs) have at least one general partner with unlimited liability who manages the business, and limited partners who contribute capital but have limited liability and limited management rights. Limited liability partnerships (LLPs) provide liability protection to all partners for the actions of other partners, while maintaining partnership tax treatment. LLPs are common for professional service firms like law and accounting practices. Each structure has different formation requirements and is suitable for different business needs.

Partnerships are pass-through entities for federal tax purposes. This means the partnership itself doesn't pay income taxes; instead, profits and losses 'pass through' to the individual partners who report them on their personal tax returns. Partners pay self-employment taxes on their share of partnership income. Partnerships must file an annual information return (Form 1065) with the IRS and provide each partner with a Schedule K-1 showing their share of income, deductions, credits, etc. Some states may impose additional taxes or fees on partnerships.

In a general partnership, each partner has unlimited personal liability for all partnership debts and obligations, including those resulting from another partner's actions. This means your personal assets could be at risk. Limited partnerships and LLPs offer some liability protection, but the extent varies by state and partnership type. To mitigate risks, consider: (1) Forming an LLP or LP instead of a general partnership; (2) Obtaining adequate business insurance; (3) Creating clear partnership agreements that define responsibilities; and (4) Consulting with an attorney about additional liability protection strategies specific to your situation.

Registration requirements vary by state and partnership type. Generally, you'll need to: (1) Choose a business name and check its availability; (2) File required paperwork with your state's business registration office (usually the Secretary of State); (3) Obtain an Employer Identification Number (EIN) from the IRS; (4) Register for state and local taxes; (5) Apply for necessary business licenses and permits; and (6) File any industry-specific registrations. General partnerships have the fewest filing requirements, while LPs and LLPs typically require formal registration with the state and ongoing compliance filings.

Without a partnership agreement specifying otherwise, a partner's departure could potentially dissolve the entire partnership under default state laws. This is why a well-drafted partnership agreement should include buyout provisions that address: (1) Notice requirements for withdrawal; (2) Valuation methods for the departing partner's interest; (3) Payment terms for buying out the partner; (4) Non-compete restrictions; and (5) Transition of responsibilities. The agreement can also specify whether remaining partners can continue the business or if dissolution is required. These provisions help ensure business continuity and fair treatment of all parties.

Partnerships use partnership agreements, which serve a similar function to LLC operating agreements. While LLCs use operating agreements to outline ownership and operating procedures, partnerships use partnership agreements to define the relationship between partners, profit sharing, management responsibilities, and other key aspects of the business. Both documents are internal governing documents that aren't typically filed with government agencies. The terminology differs, but the purpose of establishing clear rules for business operations and owner relationships is the same.