How to Form a Business Partnership

A business partnership is an agreement between two or more individuals to operate a business jointly. Partners are responsible for the other partner's business actions, as well as their own.

To form a business partnership:

  1. List the amount of equity to be invested by each partner.
  2. Determine how the profit or loss will be divided among the partners.
  3. Establish compensation levels for each partner, including when the compensation will be given and any restrictions that might affect that compensation.
  4. Set guidelines for how the business will be modified or dissolved should one or more partners wish to end the partnership.
  5. Define procedures for settling any disputes which might arise.
  6. Determine who has authority for which expenditures and how expenditure decisions are to be made.
  7. Develop procedures to follow in case of death or incapacitation of a partner.
  8. Write and sign an agreement detailing the responses to the questions above.
  9. A general partnership can be formed simply by an oral agreement, but a legal partnership agreement drawn up by an attorney is highly recommended.

Tips:

  1. Equity can be cash, physical assets or skills. Skills are an intangible asset to which a value should be assigned.
  2. In a Limited Partnership limited partners have limited personal liability for business debts as long as they do not participate in management.
  3. The partners report their share of profit or loss on their personal tax returns.