At some point you may have wondered—whether idly or seriously—if it's a good idea to start a business with a close friend, family member, or colleague whose work ethic you admire. It’s exciting to think about building something together and combining your strengths to create a thriving venture. If you're considering taking the leap in forming a partnership, it's crucial to understand the process—and we’ll help you through it.
We’ve created a step-by-step guide on how to start a partnership business, along with answers to common questions about it.
What is a partnership business?
At its core, a partnership business is just what it sounds like—a business owned and run by two or more people who share responsibilities, profits, and sometimes, the headaches that come with running a company.
Think of it as co-parenting a business baby. There are different ways to structure your partnership, and understanding these options can help you choose the one that’s best for you and your partner(s).
Know the types of partnership business
The type of partnership you choose determines the blueprint of what your business is going to look like. Here are a few common types:
- General partnership (GP): This is the most straightforward arrangement where all partners share equal responsibility for managing the business and are equally liable for any debts. It’s like co-owning a home where both of you are equally responsible for everything from paying the mortgage to fixing a leaky roof.
- Limited partnership (LP): In this setup, one partner (or more) runs the business and has unlimited liability (like managing the household), while the other partners are silent investors with limited liability (like co-signing a loan without living in the house).
- Limited liability partnership (LLP): Think of this as sharing a duplex. Each partner is involved in the business but isn’t personally liable for the others’ mistakes or debts. It’s popular among professionals like lawyers and accountants.
- Joint venture: This is more like flipping a house. You team up with someone for a specific project, and once it’s done, you go your separate ways.
Partnership business advantages and disadvantages
Before jumping into a partnership, let’s go over the ups and downs you might encounter. It’s a bit like deciding whether or not to get a roommate—you want to make sure it’s a good fit before signing the lease.
Pros of forming a partnership:
- Shared responsibility: You’ve got someone to share the load with, from tough decisions to day-to-day tasks.
- Complementary skills: Two heads are better than one, especially when you and your partner bring different strengths to the table.
- Pooled resources: Combining financial resources makes it easier to start and grow your business.
- Tax benefits: Partnerships often enjoy pass-through taxation, meaning profits are only taxed once at the partners' personal income tax rates.
Cons of forming a partnership:
- Shared liability: In a general partnership, you’re each on the hook for any debts or legal issues, which means your personal assets could be at risk.
- Potential conflicts: Different opinions on running the business can lead to disagreements that can affect both professional and personal life.
- Profit sharing: You’ll need to split the profits, which might be less lucrative than being a sole proprietor.
- Dependence on each other: If one partner isn’t pulling their weight, it can strain the business and the relationship.
Choose partners wisely and think carefully about whether partnerships align with your goals. With due diligence and professional guidance, the rewards of a partnership can far outweigh the risks.
How to start a partnership business in 10 steps
Now that you’ve got a good grasp on the topic, let’s get into the details of how to start a partnership business. These steps are a roadmap to help you and your partner(s) set up your business for success:
1. Find the right partner(s)
Choosing the right partner is like picking the co-captain for your boat—a crucial and maybe difficult step. You want someone who shares your vision, values, and work ethic. This person should complement your skills and bring something unique to the table. And, just like in any relationship, good communication is key.
Brian Hipp, co-owner and president of CH Ellis, shares his experience forming a partnership for his business. “My business partner and I bonded over a desire to revitalize a historic company and had complementary skill sets, with my engineering background and his operations experience,” he says. “Combining expertise allows us to take on more complex projects; my partner’s support has helped us overcome obstacles that I may not have survived alone.”
2. Decide on the partnership type
Once you’ve decided who you're launching your business with, it’s time to choose the type of partnership that suits your business goals. Whether you go with a general partnership, LP, LLP, or joint venture, make sure it aligns with how you want to operate and manage risks.
3. Draft a partnership agreement
Think of the partnership agreement as a prenup for your business. It’s crucial to put everything in writing—who’s responsible for what, how decisions will be made, how profits will be split, and what happens if one of you wants out.
“Beyond responsibilities and profit sharing, a partnership agreement should outline intellectual property ownership and restrictions on competition to protect the business,” says Christopher Lyle, attorney and founder of KickSaaS Legal.
4. Register your business
Depending on your location, you’ll need to register your partnership with the appropriate government body. This could involve registering your business name, obtaining licenses, and filing any necessary paperwork.
5. Set up your finances
Open a business bank account and decide how you’ll handle finances. Will you use accounting software? How will you track expenses and revenues? Establishing a clear financial plan now will make it easier to manage your money and avoid any surprises later.
6. Secure funding
If you need more capital to get started, consider your options—whether it’s combining personal savings, applying for loans, or seeking outside investors. Having a solid financial base will give you the confidence to take risks and grow.
You can also fund your dream business with the help of a high-paying job—browse open jobs on The Muse and start today »
7. Define roles and responsibilities
Make sure each partner knows their role and responsibilities—clear expectations help avoid conflict and ensure everything runs smoothly.
8. Create a business plan
Your business plan is the roadmap for your partnership. It should outline your goals, target market, competitive analysis, marketing strategies, and financial projections. Having a well-thought-out plan keeps everyone on the same page and focused on the end goal.
9. Launch and market your business
Now comes the fun part—launching your business! Whether you’re opening a physical location, launching an online store, or offering services, make sure to let everyone know you’re open for business.
10. Keep communication open and adapt
Even after your business is up and running, keep the lines of communication open. Regular check-ins with your partner(s) will help you address any issues early on and adapt to changes in the market. This relationship requires regular maintenance to keep everything in good working order.
Bottom line
If done correctly, a partnership business can be very rewarding. Make sure you choose the right format for your business and always do the work to maintain a healthy relationship with your business partners
FAQs
How do I start a new partnership business?
Start by choosing the right partner, deciding on the type of partnership, drafting a partnership agreement, registering your business, setting up finances, securing funding, and creating a business plan. Clear communication and shared goals are key.
How is a partnership business started?
Creating a partnership business starts with two or more people agreeing to run a business together. They create a partnership agreement, register the business, and launch their operations, sharing responsibilities and profits.
Is a partnership easy to start?
Forming a partnership can be straightforward if you and your partner(s) have clear goals, good communication, and a solid agreement in place. However, it requires careful planning and commitment from all parties involved.
Are partnerships profitable?
Partnerships can be very profitable, especially when partners bring complementary skills and resources. However, profits are shared, which means your earnings depend on the success of the entire business.
Is it expensive to start a partnership?
The cost of creating a partnership varies depending on your business type, location, and industry. Common expenses include legal fees for drafting the partnership agreement, registration costs, and initial investments.
What do I need for a partnership business?
You’ll need a solid partnership agreement, a business plan, necessary licenses and permits, a business bank account, and funding. Equally important are trust and strong communication between partners.
How do you start a partnership agreement?
A partnership agreement is drafted by outlining each partner’s roles, responsibilities, and contributions. It should also cover profit-sharing, decision-making processes, and procedures for resolving disputes or dissolving the partnership.
How do you approach a new partnership?
Approach a new partnership with open communication, clear expectations, and a shared vision. Make sure your goals align and that you’re both committed to the success of the business.
What are the legal requirements for starting a partnership business?
Legal requirements for starting a partnership business vary by location but typically include registering your business name, obtaining necessary licenses and permits, and filing any required paperwork with local or state authorities.
How to register a partnership?
Registering a partnership typically involves choosing a business name, filing a Doing Business As (DBA) name with local authorities, obtaining necessary licenses, and completing any state-required paperwork.
How to set up a partnership?
Setting up a partnership involves choosing the right partner(s), deciding on the type of partnership, drafting a partnership agreement, registering your business, setting up finances, and developing a business plan.