Forming a Partnership
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. Here 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:
- Each partner shares equally in the right, and responsibility, to manage the business
- Each partner is responsible for all the debts and obligations of the business
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.
Obtain the federal employer identification number first. You do it by filing Form SS-4 with the Internal Revenue Service. To obtain a federal employer identification number (FEIN): apply online with the Internal Revenue Service go to, https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online; file a paper form by mail, file Form SS-4 with the Internal Revenue Service. Download Form SS-4 and the SS-4 Instructions directly from the IRS website at https://www.irs.gov/forms-pubs.
You may apply for a state tax ID number online at https://www.mndor.state.mn.us/tp/webreg/_/, by phone at 651-282-5225 or 800-657-3605, or by filing a paper form -Application for Business Registration (ABR)- with the Minnesota Department of Revenue. The ABR form and instructions are downloadable at http://www.revenue.state.mn.us/businesses/Pages/Business_Registration_forms.aspx.
To apply online, you’ll need your federal employer ID number (FEIN), if applicable; business name or if applicable, Certificate of Assumed Name; business owner's Social Security Number; contact phone number and email address; the North American Industry Classification Code (NAICS); and business begin date.
The Partnership Agreement
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 broad 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 an attorney to assure their needs (and all the relevant legal issues) are addressed. Here are some of the issues typically addressed in a partnership agreement, grouped into specific categories.
- Name of the partnership
- Duration of the partnership
- Location of its place of business
- Capital contribution of each partner
- Whether partners may make (or may be required to make) additional capital contributions
- The level at which capital accounts of the partners must be maintained
- Participation of each partner in profits and losses
- The amounts of any regular drawings against profits
- How partnership accounts are to be kept
- Whether or not interest is to be paid on the debit and credit balances in the partners’ accounts
- Where the partnership cash is to be deposited and who may sign checks
- Responsibilities and authority of each partner
- Amount of time to be contributed by each partner
- Name of the managing partner and method for resolving management disputes
- Identification of material contracts or agreements affecting the liability or operation of the partnership
Changes in Partnership
- Procedure for admitting new partners
- The conditions under which limited partners may be accepted into the firm, and, if so, who shall be designated as the general partner.
- Basis for expulsion of a partner, method of notification of expulsion, and the disposition of any losses that arise from the delinquency of such a partner
- Circumstances under which a partner must withdraw from active participation, and arrangements for adjusting the partner’s salary and equity
- Method of determining the value of goodwill in the business, in case of death, incompetence, or withdrawal of a partner or dissolution of the partnership for any other reason
- Method of liquidating the interest of a deceased or retiring partner
- Whether or not surviving partners have the right to continue using the name of a deceased partner in the partnership name
- Procedures for handling the protracted disability of a partner
Limitations on Partners
- Prohibition of the partners’ pledging, selling, hypothecating, or in any manner transferring their interest in the partnership except to other partners
- Prohibition of partners’ outside business activities which would compete with the partnership business
- Period of time in which retiring or withdrawing partners may not engage in a competing business
When in Doubt, Spell it Out
Remember, it is impossible to pay too much attention to the partnership agreement. While these are a good starting point, your business may require very specific additions to your partnership agreement. Not sure whether something is important enough to include in your partnership agreement? When it doubt, spell it out.
Consultants at our Small Business Assistance Office can help you understand partnership agreements and how to form general partnerships. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
Our Guide to Starting a Business in Minnesota provides a detailed look at this and other important issues.