How to Form a Partnership

A partnership (also known as a general partnership) is an informal business structure consisting of two or more people. You don't have to file paperwork to establish a partnership -- you create a partnership simply by agreeing to go into business with another person. While you can form a partnership without formally filing or registering the entity, partnerships must comply with licensing and tax requirements that apply to all businesses. In addition, every partnership can benefit from a partnership agreement and business insurance.

Here are the basic steps to forming a partnership:

1. Choose a business name.
2. Register a fictitious business name.
3. Draft and sign a partnership agreement.
4. Comply with tax and regulatory requirements.
5. Obtain Insurance.

To learn more about partnerships (including the difference between a general partnership and a limited partnership), see Nolo's section on Partnerships. For information on your state's registration requirements, check out our 50-state guide on starting a business.

1. Choose a Partnership Name

In most states, partnerships may use either the surnames of the individual partners or a fictitious business name (also known as a tradename or an assumed name). If you plan on using a fictitious business name, it must be distinguishable from the names of all other registered companies in the state. For tips on choosing a unique and legally compliant business name, check out Choosing a Business Name FAQ.

2. Register a Fictitious Business Name

You cannot use a fictitious name to sell your services or goods until you fulfill your state and city's registration requirements. Typically, you must file a name registration with the state, as well as at the clerk's office in your city or town. Many states and cities require each filer to publish a statement in a local newspaper (the local agency will likely provide a list of approved publications). After the required time for publication (typically around 4 weeks), you must notify the licensing agency that you fulfilled the publication requirement. You can read more about the name registration process here.

3. Draft and Sign a Partnership Agreement

A partnership agreement is not mandatory for establishing a partnership. However, it is important to avoid misunderstandings between you and your partners. Even well intentioned, honest partners can find themselves in a legal battle if they do not have a well-drafted partnership agreement.

Here's a list of some of the items that you should cover in your partnership agreement:

• each partner's contribution to the partnership
• the allocation of profits, losses, and draws
• the partners' authority and management duties
• voting rules for decision-making
• how to admit new partners
• what happens upon the bankruptcy, withdrawal, or death of a partner, and
• how to resolve disputes.

You can always amend your agreement at a later date should circumstances or conditions change. For help creating your partnership agreement, see Creating a Partnership Agreement.

4. Comply with Tax and Regulatory Requirements

Partnerships must meet the licensing and tax registration requirements that apply to any new business. These registrations include:

Employer Identification Number (EIN): The IRS requires every partnership to obtain an Employer Identification Number, or EIN, regardless of whether the partnership has employees. This is a nine-digit number issued by the IRS for tax reporting purposes. You can register for an EIN for free at the IRS website.

Business licenses: Your business might need to obtain business or professional licenses, depending on the type of business activity you are engaged in. For example, if your partnership offers accounting services, you must comply with state licensing requirements for accountants. In addition, local regulations, such as licenses, building permits, and zoning clearances might apply to your business. Check with your city and county governments for more information.

State tax registration: Depending on your state and your business activities, you might be required to report and pay taxes, such as sales tax and use tax. Check with your state's tax agency for more information and registration.

Employer registration: If you plan on hiring employees, check the employer registration requirements in your state. In most states, you must pay unemployment and workers' compensation taxes. For more information about steps you must take before hiring your first employee, see Hiring You First Employee: 13 Things You Must Do.

5. Obtain Insurance

Because partners of a partnership are personally liable for all debts and obligations of the business, a business liability insurance policy might be your only financial protection against unforeseen events. Having adequate business liability insurance can protect your business and personal assets in the event of a lawsuit or other claim against your business. To learn more, see Opening a Business Bank Account.