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Part of How to think about partnership formation
Reading partnership formation metrics without fooling yourself
A partnership check in two parts: eight questions each partner answers separately, then ten records that have to exist and agree with those answers.
A general partnership may be formed without the state formation filing required for an LLC, but state registration, assumed-name filings, tax returns, and permits can still apply. The agreement, current books, and partners' shared understanding are important things to check—not substitutes for verifying state and federal obligations.
That shared understanding can be measured directly.
What to take away
- The first check is whether all the partners give the same answer to the same question. Do it separately, in writing, before anything else.
- Contribution, ownership, profit share and drawings are four separate records, and most disputes come from a business keeping one and assuming it covers all four.
- The agreement and books are central evidence of how partners say the arrangement works; a filing alone does not confirm those terms.
- State law controls partnership rules and filing requirements. Check the applicable state partnership statute, which may be based on the Uniform Partnership Act (UPA) or Revised Uniform Partnership Act (RUPA); adoption and provisions vary. The state office's record is a starting point, not legal advice.
The agreement check
Ask each partner, separately and in writing, to answer these. Then compare.
- Who are the partners, and when did the partnership begin?
- What has each partner contributed or promised, and how is it valued?
- What ownership share does each partner hold?
- How are profits allocated?
- How are losses allocated?
- When and how may partners take draws or distributions?
- Who may make decisions, sign contracts, or commit partnership funds?
- What happens if a partner joins or leaves, or the partnership ends?
Eight questions each partner answers
- What did each contribute?
- What share does each own?
- How is profit divided?
- Who can sign contracts?
- What if one wants out?
- What if one dies?
- What if one stops contributing?
- How does the arrangement end?
Eight questions. If every partner gives the same answer to all eight, you have a shared understanding, not necessarily a complete or legally enforceable agreement. If any answer differs, you have found the dispute early, which is the entire point of running the exercise now rather than later. The reasoning behind each question is set out in what a partnership already is.
The records check
| Record | Where it lives | Passes when |
|---|---|---|
| Written agreement | Signed by all partners | It exists, everyone holds the same version, and it covers the eight questions |
| Contributions | The books | Each contribution recorded with a date, an amount and a character |
| Ownership shares | The agreement | Stated as a number, matching what everyone said above |
| Profit allocation | The agreement and the books | The method is written and the books follow it |
| Drawings | The books | Every withdrawal recorded against a partner, with a date |
| Federal identifier | The IRS confirmation | Held, and naming the arrangement as it is actually described |
| Name filing | The office that holds it | Made where required for the name you trade under |
| Licenses and permits | Each issuing authority | Current, and in the name the business actually uses |
| Bank mandate | The bank | Signing authority matches what the agreement says |
| Tax filings | Your accountant | Someone owns the schedule, and each partner knows what they receive and when |
Ten rows. The drawings row is the one most often missing and the one that causes the most avoidable argument, because it is reconstructed from memory at exactly the moment memories diverge.
Ten records to verify
- Written agreement signed by all partners
- Contributionsdate, amount, character
- Ownership shares stated as numbers
- Profit allocation method written and followed
- Drawings recorded against a partner with date
- Federal identifier held and correctly named
- Name filing made where required
- Licenses and permits current and correctly named
What cannot be measured here
Whether the arrangement is fair. Fairness is not a property of the numbers, it is an agreement about them, and the check above tests agreement rather than fairness.
Whether a different form would suit you better. That is a judgment about exposure, tax and maintenance, made with a lawyer and an accountant, starting from the comparison in weighing the forms. If it goes that way, the mechanics of the most common answer are in forming an LLC.
Where to verify the outside items
An EIN (Employer Identification Number) is the federal identifier issued by the IRS, and the IRS issues EINs at no charge. Eligible applicants can use the IRS online EIN application or apply with Form SS-4; the IRS's forms and publications page is a place to verify IRS materials. IRS Publication 583, Starting a Business and Keeping Records, covers recordkeeping; partnerships commonly use Form 1065, U.S. Return of Partnership Income, and Schedule K-1 (Form 1065), subject to applicable filing rules.
Name and license requirements depend on the state and locality. The Secretary of State, or equivalent state business filing office, is often the place to check state records; an assumed business name may require a DBA (also called a fictitious name or trade name) filing, with the filing office varying by jurisdiction. For permits, check applicable state, county, or city business tax or revenue offices and, depending on the activity, health departments or zoning offices. What a name filing does is set out in name filings.
Running it
Once a year, and immediately whenever a partner joins, leaves, changes what they contribute, or moves to another state. Those four events are what turn a passing row into a failing one, and the wider list of events that require records to be updated is in changes to keep up with.
When to run the check
- Once a yearRun the full check
- Partner joinsRun immediately
- Partner leavesRun immediately
- Contribution changesRun immediately
- Partner moves stateRun immediately
Write the date on the check. Comparison with last year is where the value is, particularly on the drawings and profit rows, where drift is gradual and nobody notices it happening.
Common questions
We have no written agreement. Where do we start?
With the eight questions, answered separately. That gives the lawyer a document to work from and tells you immediately whether you are recording an agreement or negotiating one.
Is there a benchmark for a fair profit split?
No. Splits reflect contribution, effort, risk and negotiation, and no external figure has anything useful to say about yours.
Do we need a federal identifier if we have not filed anything?
An arrangement with more than one owner generally needs an EIN (Employer Identification Number). What the number is and is not is set out in what the identifier does, and the criteria are the IRS's own.
What if one partner refuses to do the check?
That is itself the most informative result the check can produce, and it is worth taking seriously rather than working around.
How long does this take?
An hour for the eight questions, an afternoon for the records, and considerably longer the first time if the drawings have never been recorded against individuals.
