Business partnerships are like marriages in that the foundation rests strongly on solid communication. Once you've chosen the person you want by your side in your new enterprise, it's time to turn to the practicalities of starting a business with a partner. These tasks include choosing the right business structure, deciding on the duties and responsibilities of each partner, and drawing up an operating agreement.
What follows are some of the topics you should discuss with your business partner before moving forward—think of it as a business partnership checklist.
Choosing a business strructure
When selecting your business structure, you have several choices. These vary slightly by state law, but generally, the structures include general partnerships, limited liability companies (LLCs), and corporations.
For a general partnership, you don't have to file any kind of formation documents with the state. Remember that regardless of the type of business structure you choose, you must be sure that you are following all other applicable state and federal guidelines regarding starting a business. These may include registering a fictitious or "doing business as" (DBA) name, requesting a federal employer identification number (EIN) from the Internal Revenue Service, and acquiring any other types of licenses and permits required, such as registering with the state's revenue department if you are required to collect sales tax.
A general partnership doesn't pay taxes as its own entity. Instead, income and losses pass through the individual partners and they pay taxes on their personal tax returns. To limit the personal liability for business obligations for some partners, you may choose a limited partnership.
If you choose to form an LLC or corporation, you must follow state requirements for registration. Both LLCs and corporations offer limited liability to all of their owners, which means their liability is limited only to their investment in the company. Some states also allow a limited liability partnership, offering limited liability to all partners.
Regarding taxes, an LLC is considered a pass-through entity so that profits and losses pass through to LLC owners to be reported on their personal returns. Corporations must file and pay taxes as a separate entity at the corporate tax rate.
Dividing duties and responsibilities
You're probably choosing to enter a business partnership with someone because you bring different, complementary skills and talents to the relationship. The perfect time to make it clear what each partner is expected to handle is before you begin operating as a business.
The best way to determine duties and responsibilities is to talk about them and get an idea of each partner's strengths and weaknesses. A good partner is able to recognize what they do well and what is best left to their partner. For example, the more creative and technologically advanced partner may be better suited to handle all of the business's social media, while the analytical and numbers-minded person is better for keeping the books.
Drawing up a partnership agreement
To form a corporation, you must have an operating agreement filed with the state, but for most other types of partnerships, including LLCs in many jurisdictions, you do not need any kind of agreement among partners. Just because you aren't required to have a small business partnership agreement, though, doesn't mean it isn't a good idea.
A written, simple partnership agreement between partners can be invaluable not only during good times to outline each partner's duties and responsibilities but also in bad times, i.e., if something goes awry. A good partnership agreement lays out the procedures surrounding several eventualities, including what happens to the business and its debt if one partner wants to leave, how a partner may be fired or removed, how partners may be added, how partners get paid, what recourse other partners have if one partner isn't doing their share of the work, and how the business would be divided if dissolved.
With ample forethought and planning on at least these factors, you can best guard against disagreements along the way and a potentially nasty breakup later. To be certain you're in full compliance with your state law—and also covering all the bases with your partnership agreement—you might consider seeking professional legal advice.