Everyone knows people who wouldn’t dream of going to the movies by themselves. Or out to dinner. Or to a party. Or to the beach. Or you name it.
The advantages of a partnership are clear: shared work, shared financial burdens, and shared risk. Partners may also bring talents and expertise into the business that sole proprietors may not have alone. All good stuff.
There are disadvantages, too. Sharing responsibilities, control over the company, and profits and losses can be more complicated and difficult than going it alone.
Here are some major factors to consider when deciding whether a general partnership is the best way to structure your business.
There are a few different kinds of business partnerships. They vary in legal structure depending whether – or how – the liability of partners can be limited. Today, we’re touching only on the basics of forming a general partnership.
A general partnership is a business (that is not a corporate entity) that is owned by two or more people. Under state law, general partnerships have specific attributes:
A partnership must obtain business licenses when necessary. Not all businesses are regulated or require a license to operate in Minnesota. To find out if the business you’re considering requires a license, certification or permit, visit the License Minnesota website.
Partnerships must also obtain federal and state tax identification numbers; an unemployment insurance employer account number; and may need to register the business name as an assumed name, unless the first and last name of each partner is included in the name of the partnership.
Although the partnership itself is not a taxable entity, it must file an annual federal and state “information” return with the Internal Revenue Service and the Minnesota Department of Revenue.
For this reason, both federal and state tax identification numbers must be obtained. A partnership that will be selling a product or service that is subject to sales tax also will need to register for purposes of Minnesota sales and use tax.
You can apply for a state tax ID number online,by phone or by filing a paper form through the Minnesota Department of Revenue. To apply online, you’ll need your federal employer ID number (FEIN), if applicable; the legal name or sole proprietor name and business address; the business name (Certificate of Assumed Name), if applicable; the North American Industry Classification Code (NAICS); and the name and Social Security number of the sole proprietor
Like marriages, business partnerships can be happy, productive, and last for decades. They can be turbulent, fraught with difficulty and end unhappily. Or they can be a little bit of both.
Of course, the success of any business partnership depends on the skills of the partners and how well they work together to manage the challenges they face.
But the foundation of that success is laid with a rock-solid partnership agreement that spells out the key managerial and operational details of the business. This is not a handshake arrangement or a verbal agreement, but a carefully thought-out, formalized, written document.
The partnership agreement addresses a number of issues relating to the management and operation of the partnership. In drawing up the partnership agreement, each of the prospective partners should consult with legal counsel to assure their needs and relevant legal issues are addressed. Some of the issues typically addressed in a partnership agreement include:
Remember, it is impossible to pay too much attention to the partnership agreement when forming your business partnership. Also, nothing we cover here should be taken as business or legal advice. It’s not. And it’s no substitute for the professional guidance of a lawyer or accountant.
Consultants at our Small Business Assistance Office can help you understand more about partnerships. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
For a comprehensive look at partnerships, see our Guide to Starting a Business in Minnesota . Available for download in PDF, formatted for e-readers, or available in print (all free of charge), the book covers the major issues, questions and concerns about business startups.