A partnership is a business entity in which two or more people share ownership, management, and profits. Forming a business partnership in the state of California is fairly simple. But, there are still several steps you must follow in order to register your business, including learning more about business partnership income tax management in San Diego. Here’s a plain-and-simple guide to help you correctly form a partnership in California and avoid any possible headaches come tax time.
Step 1: Evaluate the Options
Before you move forward with forming a business partnership, you should conduct due diligence to confirm that a partnership truly is the best entity for your business. Assuming that you already to know how to form a business in San Diego and California, what are your options in addition to a partnership?
Have you also considered C corp formation in San Diego? How about setting up an S corp in California state and require trusted S corp formation services? Perhaps it is LLCs that are right for you? All of these offer their own benefits alongside partnerships.
There are also two different types of partnerships: general partnerships and limited liability partnerships. In a general partnership, all partners assume unlimited liability in the business. In a limited liability partnership, one partner assumes full liability while the others are “limited partners.” A limited partner is usually an investor who simply backs the business financially in exchange for a share of profits, and does not get involved with daily operations.
You should never make decisions in haste when starting a business. Speak with a business advisor when considering your options.
Step 2: Choose a Business Name
Once you’ve made the decision to form a partnership, it’s time to choose a name for your business. The partnership can be named with the partners’ surnames, or it may hold a fictitious name. It’s best practice to make your business name as distinguishable as possible. If you go for the fictitious one, maybe a trip to the Pacific Beach or Ocean Beach could help you clear your head and find inspiration to come up with a catchy name.
Step 3: File with the County Clerk*
If you have chosen a fictitious business name, you must file a fictitious business name statement with the county clerk in the county where you intend to do business. Visit your county’s website, or call the clerk’s offices to get more information on forms and processes specific to your county. The filing fee is $26.
*If you have used surnames for your business name, this step is not necessary.
Step 4: Draft and Sign an Agreement
There is no law requiring a formal agreement between business partners. However, you should pretend there is, because it’s absolutely imperative that all partners sign an agreement to avoid any misunderstandings or fallouts once your business is up and running. Make sure your agreement is clear, comprehensive, and thoroughly reviewed by all partners. Also make sure everyone understands the basics of business partnership taxes management.
At the very least, a partnership agreement should include the following:
- Allocation of profits, losses, and draws
- Each partner’s business role
- Each partner’s management responsibilities
- A process for making business decisions
- A process for resolving disagreements
- Whether and how new partners will be admitted
Allow for your agreement to be amended in adjustment to any new circumstances that might arise.
Step 5: Obtain the Appropriate Business Licenses
Depending on what type of business you are in, you will need to apply for the appropriate licenses. For example, California requires restaurant owners to complete mandatory training and obtain a California Food Handler Card. A restaurant that intends to serve alcohol also requires liquor licensing from the California Department of Alcoholic Beverage Control. Additionally, there are permits and checks relating to crowd control, exits, and handling of emergencies.
The CalGold website from the California Governor’s Office of Business and Economic Development is an extremely useful tool that provides a comprehensive database of required licensing for any business entity in any industry.
Step 6: Obtain an Employer Identification Number
Assuming that you plan on hiring employees at some point in the future, you will need to obtain an Employer Identification Number (EIN) for your partnership. Even if hiring is not in your business plan, you may want to proceed with this step for banking purposes.
The EIN is a 9-digit number that the IRS uses for taxation. You can register for your EIN on the IRS website.
Step 7: Hire a Tax Professional
The easiest way for forming a business partnership in California is to hire a certified tax professional team such as David York’s Tax Service, which specializes in business partnership taxes management, among other things. We can walk you through all of the steps above and set up your partnership for you. Not only that, we’ll also advise on next steps once your partnership is formed—the most important of which is reporting and paying your taxes. This is where the role of business partnership income tax management in San Diego comes into play!