If you’re looking to easily create a business and you don’t require much liability protection, then a partnership may be right for you.

A partnership is formed when two or more people agree to carry on a business for profit, even if there is no formal written agreement. In a partnership, each partner can participate in the management of the business, and profits are shared usually equally among partners. But partnership interest generally can’t be transferred to another person without the consent of the other partners. 

The biggest benefit is “pass through” taxation. The partnership is not taxed on the business profits. Rather each partner includes their share of the profits on their personal tax returns. So unlike corporations, the profits from a partnership are taxed only once. But note that partnerships have to pay an additional self-employment tax, which can be a significant amount.

The biggest disadvantage is that each partner is personally liable for the business’s debts and liabilities. If your partner creates a contract with a third party, you are liable. That said, each party has a duty of good faith and fair dealing, which requires that each partner act honestly and show good faith to the other partners. 

Does the criteria above apply to you? If so, here’s how to form a general partnership.

1. Decide if you want a lawyer's help.

You don't need a lawyer to form a partnership. In fact, there are no registration requirements to create a partnership. But just as any other business, partnerships much comply with registration, filing, and tax requirements. So lawyers can save you a lot of time and energy, as well as protect you from liability in case your business doesn’t work out.

Lawyers also are less likely to make mistakes on paperwork, which will prevent a lot of future headaches. Read up on a few reasons why you need a lawyer.

2. Pick a name and search its availability. 

An important aspect of your business is its name. Your business’s name should be different from names of businesses already registered in your state. You can check the availability of your business name on the Secretary of State’s website. You should also search through the U.S. government’s trademark database (a trademark is the sign or name that people use to identify your company, e.g. the checkmark for Nike).

If you want to use a business name that is different from the partners’ surnames, you need to file a fictitious business name statement with the county clerk. The filing fee is relatively low–only $26 in CA. 

Customers generally expect the domain name of a company website to match the business name, so conduct a search to see if the domain name is available. 

3. Create a Partnership Agreement

You are not required to create a Partnership Agreement, but it’s generally a good idea to formalize the duties and obligations between you and your partners. A well-drafted partnership agreement can prevent future misunderstandings and unnecessary litigation. 

The laws governing partnerships can be complicated, so an attorney is recommended to decode the state and common law. There are a set of default rules that apply if you don’t include certain items in your partnership agreement, so consult an attorney to make sure you don’t overlook any key terms in your agreement. 

A partnership agreement should generally include the following:

• Each partner's capital contribution amount
• The allocation of profits and losses
• Voting rules
• Each partner’s management duties
• How to admit new partners
• How existing partners can exit
• How disagreements will be settled
• How to dissolve the partnership

4. Obtain Necessary Licenses and Permits

Partnerships operating in certain professions must acquire the appropriate licenses. Your partnership will likely also need a county or city business license, which can be obtained through the county clerk’s office. There can be severe fines and legal consequences for failing to comply with state and federal licensing laws. Note that you may need to renew your licenses or business permits every year. 

5. Get an EIN Number

You will next want to get an EIN for your partnership, which is basically a Social Security number for your business. The Employer Identification Number (EIN) is a nine-digit number issued by the IRS to identify a business entity and keep track of a business’s tax reporting.

You’ll need an EIN number to:

• To open a business bank account for the company
• To file Federal and State taxes
• To hire employees

After forming your partnership, you can get an EIN from the IRS for free online.

You should contact a lawyer for legal advice before registering your partnership. One of our trusted lawyers can draft the necessary legal documents for you as well as help with the business decision-making process.