HOW TO START A PARTNERSHIP FIRM
There are various kinds of business models adopted by entrepreneurs to make sure their business prospers. They may be public firms, private firms, sole proprietorship, or even a partnership firm. Here we are going to learn more about the partnership firm and how we can start a business adopting that model.
What is a partnership business?
A partnership business is a setting where two or more people are the owners of the company or organization. These partnerships are under the regulatory guidelines of state laws, as the partnership is registered with the state in which you carry out your business or provide services.
All the partners, depending on their agreement, take benefits of profit made by the organization or share their ideas and take part in business operations and decision-making processes.
When it comes to taxes, it is not the business but the partners that are taxed. Which means, the partners are liable to pay their share of taxes based on their profit through the business via their personal tax returns 2.1
Prerequisites of a partnership business
It is better to understand and know the partner you are looking to start a partnership business with. You must go through their profile and make sure they are reliable to do business with. Apart from being your friend, you should ensure they are a good business partner as well, since you will be dealing with various situations where you may disagree and it should not affect your decision-making skills. Before choosing a business partner, look for skills and profile such as
- Credit and loan history of your partner.
- Their online presence and the activities that can hinder your business and its image.
- Do a personality check. Learn about their quirks. You must be aware of the strengths and weaknesses of your partner.
Steps to start a Partnership Business:
Choose the right partner
When you are starting a partnership business, all the partners are liable to the roles and responsibilities regarding decisions on service or goods, payments, marketing, customer handling. If you want to distribute your work based on the expertise of each partner, decide it beforehand.
In a partnership business, depending on the investment and ownership, the partners must spend a certain amount on the business regularly for its development and growth. Before establishing your business, you must decide how much each partner shall contribute and what their ownership is, based on that. There should not be any confusion in this.
You must decide on the types of partners you want for your partnership business. Are you willing to divide the work responsibility equally to each partner or will all the partners have different responsibilities based on their expertise.
There are different kinds of partners such as:
They work together to make a decision and have limited liability for debts and obligations of the partnership
They contribute through monetary help but do not make day to day decision for the business
There is also a division of partners based on their obligations towards the business
Equity partners are those who own a number of shares in your company but do not participate in the day to day activities of the business. They make a profit through the growth of business and suffer losses if the business dampens. Apart from this, there are salaried partners who are paid a regular salary like an employee for their performance and management duties in the business.
The profit of the partnership is divided between partners according to their monetary contribution, their seniority, ownership of shares.
The amount due to each partner is called the distributive share. All the partners suffer losses and gain from a profit based on their contribution. There is no one partner who suffers more consequences when they are not liable to it. the amount each partner takes out of the partnership from this percentage is discretionary and for tax deduction purposes mostly.
Decide the type of Partnership
Depending on your interest from the above-given data about the types of partners and the division of role, you must decide what type of partnership will like to have for your partnership business.
This partnership variation can be different for your state as there might be some other options available. You must check with your state’s business division to see what are the types of partnerships are available.
Decide a partnership name
The name of your partnership depends a lot on the type of partnership you have chosen for your business.
A business name is vital for any business as it is the face of your company and once you decide what it is, there is a long process to register it and even to make a change in the business. So you must make sure that you have a well thought-out name with the consensus of all the partners for your business. Along with your business registration, you must file for trademark registration and check whether the name you have chosen for your business is taken by somebody else or if it is already registered with the state. Although this is not a separate process you must check the availability to avoid a delay in your business registration.
Register your Partnership firm with the state
Once you have finalized the type of partnership and its name, you have to register with your state. You need to go to your Secretary of State website and find the business and corporation section. You have to register your business as a partnership online only.
Depending on your business location, if you expand your business to a different state, you have to register your partnership in all the states you carry out business in. At this step, you have to decide on a location that will be the headquarter for your business activities.
Get the Employer ID Number
Once you get the business name and register the type of your partnership, you can get an Employer ID Number (EIN) from the IRS. All businesses need EIN, even if they do not have any workers or employees. You can apply online for EIN and get the number immediately.
You must be aware of fraudulent sites and agents as there are many fake EIN application websites. Make sure you use the official government site as prescribed by IRS and stick to it.
Form a Partnership Agreement
You must have a partnership agreement with the consensus of all the partners of your company. This includes all the ifs and buts and makes an official statement about the roles and ownership of each partner. Make sure you have included all the situations of disputes and do not miss anything.
You may not require a lawyer to do the enlistments with your state and get the EIN. However, having a lawyer help you out with the partnership agreement is an added benefit. You might have the option to do the main draft and have a lawyer take a look at it. A lawyer will assist you with settling on the right consensus and will help in understanding your state’s laws and will forestall botches and missed areas that you might have to face later on.
Get all the other license and permits for your business
Other legal registration and obligations that you must sign up for your partnership businesses:
Registration with state taxing authority for the selling taxable products and services
Registration to pay federal taxes with the EFTPS payment system. This is for the taxing employees of your business if you have any.
Get a DBA(doing business as) registration for your business
Depending on the types of partnerships you have chosen for your business, you must register for other business licenses and permits that may vary according to states and the types of business activities carried out by you.
To open any business, one should be ready to work hard and show a lot of perseverance and determination. Any business will have good and bad days but it depends on the owner and how they want to go about it. It depends a lot on your skill and quality and how the world reacts to it. Give your business time to grow and settle in this huge industry. You will definitely make it big with your talent, so don’t get overwhelmed and enjoy the process. All the best!