Understanding how a partnership works

On Behalf of | Jan 11, 2022 | Firm News | 0 comments

If you are starting a company with another individual, there are various ways you can structure your business. The formation you choose will depend on the specific business, how you want to divide profits and how much liability you want to have, among other factors.

One option for two or more parties is a partnership. However, before choosing this entity, you should know what a partnership entails.

What constitutes a partnership

According to the Legal Information Institute, a partnership consists of two or more individuals, groups, companies or corporations. Because of this variety, a partnership may be a simple collaboration, or fairly complex. The parties decide the percentage of ownership each one will have. This share determines the control of the business as well as profit distribution. In terms of liability, typically all partners share responsibility for the company’s debts.

Steps involved in forming a partnership

The level of governance for partnerships is the state. Each state has specific laws regarding partnerships. It is vital to know what the requirements are for creation and operation in your jurisdiction. Once you and your partners decide on a name, you can register it.

Although there is generally no requirement for creating a written partnership agreement, it is generally a good idea to do so in order to:

  • Establish the ownership percentage of each partner
  • Outline each partner’s responsibilities
  • Establish overall and daily operations
  • Define conflict-resolution strategies
  • Outline partnership dissolution steps

If you will have employees, you will need to obtain an employer identification number from the state. You may also need to obtain certain licenses depending on the specific business.

Tax information

According to the IRS, each partnership entity must file an annual return to report the company’s income, losses, deductions, gains and more. However, the partnership does not pay taxes on its profits. Each partner receives a Schedule K-1 from the company and files a personal return reporting his or her share of the company’s income and losses.

For further information about partnerships or whether it is truly right for your situation, inquire with a legal professional with knowledge in this area of law.