A partnership requires at least two partners in order to be legitimate. Each owner/partner has the right to make decisions affecting the business and a right to a share of the revenue, expenses, and profits/losses of the business.
There is no need to file anything with any government agency to form a general partnership unless the name of the partnership will be something other than the names of the partners. If that is the case, you must file a Fictitious Business Name statement in your county. You are free to set up business locations in any state.
Partnerships can be formed by a simple verbal agreement. A written partnership agreement, however, is a wise investment and is a necessity if the ownership will not be equally divided. In the absence of a written agreement, state law mandates equal ownership among you and your partner(s).
With a written agreement, the partners may specify, among other things, percentage ownership, allocation of profits, decision-making, and responsibilities. Share ownership may be based on the amount of money each has invested in the business or on some other factor that you choose. For example, you may have more cash to invest and your buddy, more expertise or contacts to offer. You and your partner(s) decide how to value each what you each has brought to the partnership in determining what percentage of the business each of you will own.
Legal issues aside, no matter how solid and friendly the relationship is between the parties at the beginning of the partnership, it is far easier create a written agreement while things are going well than to wait until a disagreement has surfaced and try to sort issues out under the stress of a conflict. Have an attorney draft or review the agreement if you decide to have one.
Neither you nor your partner(s) are considered employees and thus, will not receive a salary. Revenue, expenses (operating and/or depreciation) and tax liabilities flow through to each of you based on your proportion of ownership. You will be taxed on that proportional share of profit regardless or whether or not the profit is actually distributed to you. The partnership itself is not required to pay taxes on its profits. However, it must file an informational statement (IRS Form 1065) and provide each partner with a copy to be included with his or her individual income tax return.
The debts and liabilities of the partnership are the debts and liabilities of each partner. Any partner can obligate the partnership through contracts or other binding agreements and each partner is personally liable for the decisions and acts of all the other partners. For that reason, as obvious as it may seem, it is critical that you enter into partnerships with people whose judgment you trust and that you each discuss how decisions affecting the business will be made. Regardless of the internal agreements you make with each other, however, to the outside world, one partner's commitment commits the firm, even if that partner acted in conflict with your internal agreements. General partnerships are rarely used except when required by law (e.g. a law firm is required to be a partnership so that all partners are liable for the acts of the firm.)
Legally, partnerships can sue, be sued and own property. However, in some ways, partnerships also act as a collection of individuals, not a separate entity like a corporation. Partnership assets are considered tenancy in partnership and as such cannot be transferred without the consent of all partners. They are also not attachable by the creditors of the individual owners. However, profit distributions from partnership interests are the separate property of each partner and are attachable and transferable.
A partner may transfer his or her partnership interest to another person. This does not make the transferee a partner in your business, however. The original partner remains: just his or her economic interest in the business is transferred. This could lead to a messy situation where a partner is active in the business making decisions for the partnership but not having to suffer the economic consequences of those decisions. The remaining partners may then elect to expel the transferring partner and dissolve the partnership to protect their interests.
The death, incapacity, bankruptcy, resignation or expulsion of any partner dissolves the partnership unless instructions to the contrary are specifically outlined in the partnership agreement. The assignable assets go to the partners who are entitled to ownership. If you or one of your partners resigns without violating the partnership agreement, the resigning partner retains ownership rights in the assets of the partnership. If the resignation violates the partnership agreement, the resigning partner forfeits his or her ownership rights in the partnership. He or she will then be paid a dissolution distribution after the partnerships' liabilities have been satisfied. Whether the resignation violates the partnership agreement or not, the partners who still have ownership interest after the resignation will then choose to end the business by liquidating its assets or continue the business by assigning the assets to a new partnership or corporation.
| General Partnership | California | Illinois | Massachusetts |
| Initial State Filing Fees | N/A | N/A | N/A |
| Annual State Fees/Tax | N/A | N/A | N/A |
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