Have you been working towards starting a business and choose a partnership structure for it? Well, good choice! Starting a business that includes several owners is a bit more complicated than a one person business.
If you follow the steps given below you can make it easier and the process faster for you and your future partner. Well, a good thumb rule for making decisions is to “begin the way you want to go on.”
What is a Partnership?
A partnership is an organization where individuals acknowledged as partners, agree to collaborate to promote their mutual interests. The partners that are in the partnership may be businesses, organizations, schools, combinations, governments or individuals.
Both parties agree on specific conditions and share the running of the company and also split the profit and losses. Here we will brief everything for you about getting the partnership ready. When you are starting a partnership, you have to consider making long-term decisions. As the years pass by how will the partnership change?
You should think about the partners that you might add later on? What are you going to pursue after the partnership gets successful? How will the tax situation in the partnership change? Since you will want to limit the liability and pay less tax as possible. Depending on the type of the partnership some of them, for their actions as partners voluntarily ask for less or more liability.
Depending on how you choose to structure the partnership, legally you can limit the taxes paid by partners. In a partnership, the partners have to pay the taxes and not the business itself.
First step: Make Decisions About Partners
Starting a partnership with one or more owners is a bit of a task as there are numerous decisions that you have to take. Decisions about all the payments regarding the members, roles, and responsibility. Some of the decisions are given below.
Each partner’s contribution to the company. Usually, there is a specific amount that the partner has to bring in while joining. You, as the decision maker have to decide the exact amount that partner coming in has to contribute. Also, you will have to keep a figure for how much partners that will join in the future have to bring in.
- Types of partners: What are the types of partners do you want? Do you want them to be the same or do you want to bring in different ones each assigned with different responsibilities? Some other partnerships consist of two types of partners- Limited partners and General partners. Limited partners are those who only contribute and do not have a say in the daily operation of the company.General partners are those who control the daily work and make decisions. You have to choose the type you want in your partnership. You can also have partners who will be paid salaries and ones that contribute to the equity. These types of partners are known as a salaried partner and equity partner.
- Shares of each partner: What percentage of profit is given to each partner? Earnings of the company have to be distributed between the partners, and you also have to decide the ratio of profit each one gets. Usually, they are divided on the basis of their rank, contributions or a combination of both. The amount given to the partners individually is also known as distributive shares.
- Alongside the profit, the partners also have to share the losses: Partners can share the same percentage of losses as their profits. The distribution is done for the taxes. The taxes will be charged individually to the partner’s and not on the businesses profit.
Second Step: Decide on Partnership Type
On the basis of the decisions taken in the first step, you should choose a partnership type as there are many to choose from.
- General Partnership – In this type, all the partners participate in the daily operations and decision making. In the same way their share in the partnership is.
- Limited Partnership – IT consists of both general and limited partners as the general partner will control the day to day decisions and the limited partner will contribute to the equity.
- Limited Liability Partnership – Here the partners are all protected from all the liabilities in a normal partnership.
There are more types of partnerships depending on the state that you are living. So make sure you check it with the state’s business division to get to know about the other types available to you.
Third Step: Select a Partnership Name
Your partnership type will help you to determine the name. If you have a limited liability partnership, then it has to include in the name. Also, some states have name requirements for the businesses types. This means that you have to check the requirements of your state for the naming of your partnership.
Keep in mind while considering a business name that, that name should be short, and enough to tell something about the company and its products or services. Before you go to the fourth step, you can also register your partnership name with the state if you want to. Registering it early then you do not have to register the name of the business separately.
Fourth Step: Register the Partnership in Your State
After you have all the information that will be required for your partnership, got to the Secretary of State website of your own state and look for the corporations or business section. In this place, you will be able to register your business as a partnership. In several states they let you complete the registration online.
If you are planning to do the business in more than one state. Then it will be required to complete this registration in each state that you are going to do business in. In the state that you start the business in, it will be a domestic partnership, and in other states, it will be registered as a foreign partnership.
Fifth Step: Employer ID Number
You are now required to get an employer ID number from the IRS after all requirements like the business name, type, and location are there. It is essential for almost all the businesses to get an EIN even though they do not have employees. It is a simple process to get the number. You can go and apply online or call them on their phone number and get the EIN immediately.
Sixth Step: Establish a Partnership Agreement
A partnership agreement is a document that states all the terms and conditions the partners placed and agreed on with their signatures down. It also includes answers to all the “what if” questions that could ever come up. Answers to all different types of situations are given in it.
Seventh Step: Get all other Licenses, Registration and Permits Done
You will need to get some of the regulatory and legal tasks done, given below is a quick list.
- You need to register with your state taxing authority for sales taxes.
- Get registered with the EFTPS payment system to pay federal taxes. (This is associated with paying the employment taxes if you have employees in the company)
- Within your city or country, you will need a fictitious file name registered. It is called (DBA) “doing business as” sometimes.
- At last, depending on the type of partnership, to get business and licenses and permits you will have to register with your locality. The checklist with the licenses and permits can be used to confirm whether you have all the required legal documents.
It would be recommended to hire a lawyer to help throughout this process. Having one will save time if any errors are made he will tell you and you can rectify them before submitting them, if not then after submitting you will have to wait for them to see it and then they will call you back to rectify it, and this will waste time. Having one will also help you solve any issues with legal advice.
If all these steps are followed, you can save much time and have a quick start towards the running and success of your partnership. In case you need help with registering and incorporating your business, contact IncParadise today!