How to Start a Partnership

Choose the Type of Partnership

A general partnership is the default when two or more people go into business together without forming a separate entity; every general partner carries personal liability for the business's debts and can be held responsible for the actions of the other partners. A limited partnership has at least one general partner with full liability and management control, plus one or more limited partners who contribute capital with liability generally limited to their investment. A limited liability partnership (LLP) extends some liability protection to all partners, commonly used by licensed professionals such as attorneys or accountants. Which type fits depends on how much liability protection the owners need and how actively each one will participate in management.

Draft a Partnership Agreement

A partnership agreement isn't always legally required, particularly for a general partnership, but it's the document that spells out each partner's ownership percentage, capital contribution, share of profits and losses, decision-making authority, and what happens if a partner wants to leave or the partnership dissolves. Without one, state default partnership law controls instead, which may not reflect what the partners actually intended, such as splitting profits equally regardless of unequal contributions.

Register With the State if You're an LP or LLP

A general partnership typically requires no state formation filing, though a name other than the partners' own legal names usually still needs a separate DBA filing. A limited partnership or LLP, by contrast, generally files a formation document with the state's Secretary of State, naming the general and limited partners (for an LP) or confirming the professional licensing status of the partners (for an LLP, in states that limit it to licensed professions). Check your specific state's requirements and filing fee, since both vary by state and partnership type.

Get an EIN

Apply for a free EIN directly from the IRS once the partnership is formed; it's typically issued immediately online. A partnership needs an EIN to open a business bank account, hire employees, and file its annual return, regardless of which type of partnership it is.

File Form 1065 and Issue Schedule K-1s Every Year

Per the IRS, a partnership doesn't pay income tax itself; instead, it passes profits or losses through to the partners, who report their share on their own personal returns. The partnership still must file Form 1065 annually, an information return reporting the partnership's income, deductions, gains, and losses, and must provide each partner a Schedule K-1 showing that partner's specific share. Partners generally also file Schedule E and Schedule SE on their personal returns and make estimated tax payments with Form 1040-ES, since partnership income isn't subject to withholding the way employee wages are.

Register for State Taxes, Licenses, and Employment Obligations

If the partnership sells taxable goods or services, register for a state sales tax permit. If it hires employees, register for state unemployment insurance and file federal employment tax forms such as Form 941 or Form 943, and Form 940 for federal unemployment tax; per the IRS, partners themselves are not employees and shouldn't be issued a Form W-2.

General Partners Carry Real Personal Risk

Because a general partner can be held liable not just for their own actions but for the other partners' actions too, choosing partners carefully, and putting clear terms in the partnership agreement, matters more in a general partnership than in almost any other structure. If this liability is a significant concern, an LP, an LLP, or converting to an LLC may fit better.

A Partnership Agreement Fills Gaps State Law Doesn't Address Well

Even where a written partnership agreement isn't legally required, state default partnership law rarely accounts for the specific deal partners actually struck, particularly around unequal capital contributions or a buyout if a partner leaves. Treat the agreement as a practical necessity even when it's not a legal one.

Partners Aren't Employees, Which Changes Tax Withholding

Because partners receive a Schedule K-1 rather than a W-2 and aren't subject to payroll withholding on partnership income, partners typically need to make their own quarterly estimated tax payments to avoid an underpayment penalty at tax time. Budget for this rather than assuming taxes are handled the way they would be for a wage-earning employee.

Professional Partnerships Often Default to an LLP

In fields like law and accounting, state rules sometimes limit which entity types licensed professionals can use, and an LLP is a common option that provides some liability protection while meeting those professional licensing rules. Check your specific state's rules for your profession before assuming a general partnership or LLC is available.

This Is Not Legal or Tax Advice

Which partnership type, state filing, and agreement terms fit a specific business depend on its partners, industry, and state. Talk to an attorney about drafting the partnership agreement and a tax professional about each partner's specific tax situation.