How to Change Ownership From a Proprietorship to a Partnership

by David Carnes

    If you are a sole proprietor, it is easy to form a partnership -- simply agree with at least one other person to do business together and share profits and losses. Your company will automatically be treated as a general partnership for legal purposes, even with nothing more than a handshake to seal the agreement. The resulting partnership could face significant legal liability, however, unless you resolve certain matters and create a written partnership agreement.

    Step 1

    Invite partners who are capable of making contributions to your business. These contributions may be tangible contributions such as money or equipment, or intangible contributions such as expertise or business connections.

    Step 2

    Select a name for the partnership. Make sure that it is unique by searching state records to see if an identical or confusingly similar business name is in use. The website of the secretary of state of your state may have an online name search function. Some states require a general partnership's official name to include the names of the partners.

    Step 3

    Negotiate the basic terms of the partnership with the other partners. Important issues include partner contributions, the distribution of profits and losses, voting rights, the departure of partners, the entry of new partners, the authority of each partner, the partnership management structure and dispute resolution procedures.

    Step 4

    Draft a partnership agreement reflecting the terms you negotiated with the other partners, and have all partners sign it. The partnership agreement does not have to be filed with state or federal authorities. Without a partnership agreement, a court will apply state law default rules to resolve disputes among the partners.

    Step 5

    Select a fictitious business name and register it with your state's secretary of state, if you wish to do business under a name other than the name of the partnership.

    Step 6

    Obtain any required additional licenses, if you are expanding your line of business after forming the partnership. If your sole proprietorship required licenses to operate, you must have them re-issued in the name of the partnership to continue to use them.

    Step 7

    File formation documents with your state's secretary of state if you wish to form a limited partnership, limited liability partnership or a similar limited liability entity. Pay any requisite fees.

    Tips & Warnings

    • In a limited partnership, a general partner is legally liable for financial liabilities created by the wrongful acts of the other general partners including malpractice. An injured party may sue all general partners and recover the judgment from whoever has the funds to pay. Limited partners are insulated from such liability as long as they do not take an active role in the day-to-day operation of the business.

    About the Author

    David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

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