What Are the Formalities for a Partnership Arrangement?

According to the Internal Revenue Service, a partnership is any unincorporated organization of two or more people carrying on a business, trade, financial operation or venture and dividing the profits. Your partnership should register with the secretary of state where it operates, agree on a partnership name and obtain an employer identification number from the IRS. Although it's not required, it's also advisable to draft a formal partnership agreement.

Draft a Partnership Agreement

Technically, a partnership can be formed by oral agreement and doesn't have to be in writing. To avoid misunderstandings, though, it's best to create a written partnership agreement. RocketLawyer suggests that you and your partners consider and address the following topics in the agreement:

  • Ownership percentages: How much of the partnership does each partner own? This can be determined by the amount of capital each partner contributes, the amount of work each partner plans to perform or some other measurement.
  • Transfer of ownership: Can partners transfer partnership shares to spouses or children? What happens to the shares if a partner dies?
  • Partnership duration: By law, partnerships automatically terminate if one owner dies or sells all his shares. But you can add a provision that allows other partners to buy back shares and continue the partnership's existence.
  • Partnership management: What role will each partner play in managing the business? Not all partners need to have a partnership role.

Pick a Business Name

The U.S. Small Business Administration notes that your partnership's legal name is the last name of all your partners unless you choose otherwise. For example, if you're named John Smith and your partner is named Jane Doe, your partnership name is Smith and Doe.

Alternatively, you can choose a fictitious name for your partnership. This is referred to as a "Doing Business As" or a DBA. When choosing a DBA for your partnership, don't use any words that would mislead a customer about the nature of your business. For example, you can't end your DBA with "Inc.," because you're not a corporation.

Register Your Partnership

To conduct business, you'll need to register your partnership with your state's the secretary of state. This involves filling out a form with the partnership information -- including any DBA name -- and paying a filing fee. Depending on where you are, you may need to pay a local business fee or purchase permits and licenses to do business. Contact your secretary of state for more information.

Get an Employer Identification Number

The IRS requires partnerships to obtain an employer identification number. You can apply for the number online, by fax, by mail or by phone. You'll need this number to identify the partnership when you file the partnership's annual tax return.

About the Author

Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.