Consultant’s Corner: Forming a General Partnership
Question: I am ready to start a business with a partner. What steps should I take?
You can review information for forming a General Partnership at state and legal websites; however, these are the general steps required for formation of this entity type:
- Choose a business name
- File a trade name
- Draft and sign a partnership agreement
- Obtain licenses, permits, and zoning clearance
- Obtain an Employer Identification Number
Choosing a Business Name
Doing Business As (DBA) name, assumed name, fictitious name, and trade name generally refer to the same thing, but business name registration laws and processes do vary by state. You can usually find a trade name search tool and the Trade Name Report form and various other forms at your Secretary of State’s website.
If you plan to operate only in one state, then searching state registered names may be sufficient; however, if you plan to operate in multiple states, then you may want to conduct a broader name search in order to insure that the name is not already in use. In addition to federal and state trademark searches, you may need to conduct searches through other sources, such as the Internet, local Yellow Pages and, for business names, county or state level business entity and fictitious name databases. While this can be a time consuming process, under common law, the first use of a name for commercial purposes entitles the user to certain rights that could affect your use of a name. You may ultimately need the assistance of a local lawyer to determine the commercial availability of your name and for help in conducting your search, or clarification of similar or conflicting names. The following federal government website includes the registered trademark search tools:
Trademarks Overview | USPTO.gov
Taxation of General Partnerships
We do not know how much capital is being invested or awarded and if it will be equal ownership; however, a partnership is a pass-through entity for tax purposes. The partnership reports all of its income and expense on a separate tax return, Form 1065, and pays no tax on its net profit. A partnership passes through its net profit or loss to the partners based on their ownership interest in the partnership. Each partner’s share of the partnership’s net profit or loss is reported by the partnership on Schedule K-1. Each partner reports the amounts from their respective Schedule K-1 on Schedule E of their personal Form 1040. Partners do not take a W-2 salary but may take guaranteed payments, which the partnership deducts as a business expense and/or periodic cash draws of their share of the partnership’s net profits, which the partnership cannot deduct as a business expense. However, partners are taxed on their entire share of the partnership’s net profit regardless of whether they ever take profit distributions. Partners are not required to withhold payroll taxes from their guaranteed payments or periodic cash draws, but they may need to make personal estimated income tax payments depending on their personal income tax situation. Generally, a partner’s share of the partnership’s net profit will be subject to both federal and state personal income tax and, if net self-employment earnings are $400 or more, the SE Tax. You can review IRS and related information on partnerships at the IRS website:
Partnership Paperwork
Even if a partnership is a family business, you should still have a written partnership agreement and other governance paperwork. Members of GoSmallBiz.com have access to forms such as a partnership agreement within the membership area. You can also locate sample partnership and other business agreements (some free and some for a fee) at legal and business websites like the following:
Partnership Agreements:
Sample Partnership Agreement | PublicLegalForms.com
Buy/Sell Documents:
Buy-Sell Agreement Contract Template | USLegalForms.com
Templates and sample documents can be very useful but businesses should exercise caution in the use of such documents.
Licensing
Partnerships generally require a local city or county business license and, possibly, a state professional or occupational license, which you can research through your state government’s website.
Tax IDs
Partnerships are required to obtain a Federal Tax ID number, also known as a Federal Employer Identification Number or EIN, from the IRS.
Related: How do I Get a Federal Tax ID for my Business?
Also, when forming or changing a business entity for an existing business, you often need to obtain a new EIN. Federal Form SS-4 is used to apply for an EIN, so before contacting the IRS to obtain an EIN you will need to complete this form. Once you have completed Form SS-4, you have the choice of applying online at the IRS website, by contacting the IRS by phone, or by faxing or mailing your completed Form SS-4 directly to the IRS. You can obtain an EIN immediately by applying online or over the phone. Form SS-4 can be downloaded from the IRS website. Once on the IRS website, enter “Form SS-4” in the Find box and search for the form. You can also find information on EIN requirements, application forms and filing instructions through the IRS website at the following links.
