If you are thinking about starting a business with someone else, a general partnership may be the best entity structure for you. Not only is it easy to create, but it also offers flexibility and allows for shared decision-making and profits.
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Before you start your partnership, you will need to familiarize yourself with the legal requirements and steps involved in creating a general partnership in Colorado.
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What is a General Partnership?
A general partnership is a type of business entity where two or more individuals own and manage a business together. It is a commonly used structure for small businesses because it does not require formal filings or annual reports with the state.
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In a general partnership, each partner is responsible for the debts incurred by the business and is entitled to share in the profits and losses according to the terms of the partnership agreement.
Step-by-Step Guide to Creating a General Partnership
Step 1: Choose a Name for Your Partnership
Choose a name for your partnership that is not already in use by another entity in Colorado. You can search for existing business names in the Colorado Secretary of State’s business database.
Your partnership name must also comply with Colorado naming requirements, which means it should not imply that your partnership provides professional services unless licensed to do so.
Step 2: Draft a Partnership Agreement
A partnership agreement outlines the business operations, management, and financial arrangements among partners. It should include the following types of provisions:
- Division of profits and losses
- Capital contributions
- Management responsibilities
- Decision-making procedures
- Dispute resolution procedures
- Adding or terminating partners
- Business dissolution
While partnership agreements are generally not legally required by Colorado law, it is strongly recommended to have one in place to protect the interests of all partners and avoid potential conflicts.
Step 3: Register Your Partnership
Under Colorado law, you are not required to register or file any documents with the state to form a general partnership. However, you may wish to register your partnership to obtain an assumed name or doing business as (DBA) name if you plan to use a name other than the actual full names of the partners.
To obtain a DBA name, you must file a trade name application with the Colorado Secretary of State and pay the applicable fees.
Step 4: Obtain Necessary Licenses and Permits
Depending on the type of business and industry, you may need to obtain licenses and permits from the state, county, or city where the business is located.
For example, certain occupations such as lawyers, doctors, and accountants require professional licensure. Other industries such as food service, retail sales, and construction require specific permits.
To determine what licenses and permits are required for your specific business, check with the Colorado Department of Regulatory Agencies and the Business-License Compliance Division of the Secretary of State’s office.
Step 5: Open a Business Bank Account
Open a business bank account in the name of your partnership to separate your personal and business finances. Most banks require that you provide a partnership agreement or certificate of assumed name, as well as your tax identification number (TIN) or employer identification number (EIN).
Having a separate business bank account helps maintain accurate records for tax purposes and can also help establish your business’s creditworthiness.
Step 6: Obtain a Tax Identification Number
All partnerships are required to obtain a TIN or EIN from the Internal Revenue Service (IRS).
The TIN or EIN is a nine-digit number used by the IRS to identify your partnership for tax reporting purposes. You will need to provide this number to your bank to open a business bank account, and it will also be used to file annual tax returns.
You can apply for a TIN/EIN online through the IRS website or by completing Form SS-4 and mailing or faxing it to the IRS.
Step 7: Comply with Federal and State Tax Obligations
In addition to obtaining a TIN or EIN, you will also need to comply with federal and state tax obligations, such as:
- Filing annual partnership tax returns (IRS Form 1065)
- Paying self-employment taxes on your share of partnership income
- Making estimated tax payments throughout the year
- Complying with state tax requirements such as sales tax, and income tax (if applicable)
It is important to consult with a qualified tax professional to ensure that you are fulfilling all your tax obligations.
Conclusion
Creating a general partnership in Colorado is relatively easy compared to other types of business entities. However, it is essential to draft a comprehensive partnership agreement and take necessary steps like registering for assumed name and obtaining necessary licenses and permits before you start operating your business.
Starting a business with someone else is a significant decision, and a general partnership can be a great way to achieve your business goals while sharing risk and responsibilities. Follow the steps outlined in this article to create a successful and legally compliant partnership in Colorado.
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