What does starting a partnership involve?

NMSBDC

Entrepreneurs who plan to go into business with one or more other people may not realize that there are several variations of partnerships to consider. In this article, I will describe the different types of partnerships and what it takes to start and maintain them.

Business owners should keep in mind that there are legal and tax issues to consider when choosing a type of business entity. So, before deciding, it is wise to consult a lawyer and an accountant or tax advisor for advice.

First of all: what is a partnership?

A partnership is when two or more parties (“partners”) agree to go into business together and share the profits and losses. The partners’ obligations in running the business and their degree of personal responsibility for the debts of the business vary depending on the type of partnership. The tax responsibilities of partnerships go through the individual tax returns of business owners. Although partnerships do not pay income tax at the corporate level, they do have reporting responsibilities to complete. Therefore, they need an EIN (Employee Identification Number) from the IRS for tax reporting purposes.

To follow along, I’ll cover information on the three most popular types of partnerships:

• Global partnership

• Limited partnership

• Limited liability company

1. General partnership (GP)

This is the most basic form of partnership and generally does not require any entity registration documents with the state. In a general partnership, ownership and profits are divided equally among the partners, unless the terms of the limited partnership provide otherwise. All partners share responsibility for the debts and legal obligations of the business as no legal separation exists between the business and its owners.

Partnerships are generally straightforward to form and maintain, so they are an attractive option for entrepreneurs who want to minimize administrative and compliance responsibilities.

They have no restrictions on the number of partners they can have. The owners of a general partnership are not considered employees of the company. Therefore, they do not receive a paycheck through the company’s payroll. Partners are typically paid by withdrawing funds from their share of the profits (called an “owner’s draw” or “partner’s draw”). General partners pay both income tax and self-employment taxes (health insurance and social security) on their share of the company’s profits.

How to start a general practitioner

A partnership is established when its owners decide to do business together, even if there is no written plan or partnership agreement in place. To ensure that all partners are on the same page, it is beneficial to have a partnership agreement that defines the roles, responsibilities and distribution of profits for business owners.

A general practitioner can continue to exist when the partners leave the company if his partnership agreement allows it. Otherwise, the business may need to be dissolved.

Possible ongoing compliance tasks for general practitioners:

• Declare and pay income and self-employment taxes.

• Register for a sales tax identifier (seller’s permit).

• Register for payroll taxes (if the business will have employees).

• Obtain the required licenses and business permits and keep them up to date.

2. Limited partnership (LP)

Limited partnerships are business entities officially registered with the state. One of the reasons entrepreneurs can choose this type of partnership is to have the option of bringing in partners to invest in the business without incurring the costs and paperwork required to form a limited liability company ( LLC) or a corporation. A partnership agreement is used to describe the responsibilities of partners and document the percentage of profit for each partner.

An LP has at least one general partner and one or more limited partners. Sponsors provide money but are not actively involved in the day-to-day running of the business. As such, they enjoy limited liability protection (to the extent of their investment in the business) for company debts and legal issues. The general partner (s) of an LP are responsible for managing the operations and management of the business. These people have unlimited personal liability for the debts and legal issues of the business. Thus, creditors or lawsuits can attack the personal property of general partners, but not the personal property of limited partners.

The general partners in a limited partnership are not considered to be employees of the company either. Their partner income derived or guaranteed payments to compensate them for their work in the business are subject to income tax and self-employment tax.

In a limited partnership, the limited partners earn money through the business based on their share of the profits. The business may make periodic payments or draws from associates to sponsors throughout the year. Since limited partners earn passive income from their monetary investment rather than income for any work done in the business, what they earn from the business is subject to income tax, but not to income tax. self-employment tax. However, if a limited partner receives guaranteed payments for any work they are authorized to do for the business, that income is subject to Medicare and Social Security taxes as well as income tax. returned.

How to start an LP

Forming a limited partnership involves filing a limited partnership certificate with the state and paying the required registration fees. An LP must obtain an EIN from the IRS for tax reporting purposes.

Limited partners can leave the company or be replaced, and the LP can continue to exist. If a general partner leaves, some states require the other partners to dissolve the limited partnership unless the company’s partnership agreement says otherwise.

Possible ongoing compliance tasks for LPs:

• File an annual report with the state.

• Assign and maintain a registered agent in the state.

• Declare and pay income and self-employment taxes.

• Register for a sales tax identifier (seller’s permit).

• Register for payroll taxes (if the business will have employees).

• Pay the franchise tax

• Obtain the required licenses and business permits and keep them up to date.

• Separate the personal finances of the business and partners.

3. Limited liability company (LLP)

A limited liability company is similar to a general partnership – all partners can be involved in running the business. However, unlike a general partnership, all partners are protected by limited personal liability. This form of business structure is generally used by entrepreneurs in specialized professions (eg accountants, lawyers, accountants, wealth managers, engineers, architects and doctors). Besides the benefit of personal liability protection, the LLP structure also gives professionals the ability to pool resources (such as administrative staff, equipment, etc.) and reduce operational costs compared to autonomous operation.

Most states require that all LLP partners be licensed to practice the same profession. In an LLP, all partners are personally protected against business liability (the degree of liability protection available to them varies by state), even though they have full responsibility for managing the business. business. LLP partners are paid out of the profits of the business, and these draws are subject to income tax and self-employment.

How to start an LLP

The paperwork required to form an LLP is generally referred to as a “limited liability company certificate”. It must be filed with the appropriate public agency along with payment of the required fees.

It is important to note that not all states recognize the LLP as an entity and some states only allow certain types of professionals to form one.

LLPs can continue to exist when individual partners leave or die if the company’s partnership agreement details these circumstances.

Possible ongoing compliance tasks for LLPs:

• File an annual report with the state.

• Assign and maintain a registered agent in the state.

• Declare and pay income and self-employment taxes.

• Register for a sales tax identifier (seller’s permit).

• Register for payroll taxes (if the business will have employees).

• Pay the franchise tax.

• Obtain the required licenses and business permits and keep them up to date.

• Separate the personal finances of the business and its partners.

Is a partnership right for your business?

The business structure you choose will be one of the most crucial decisions you will need to make. Because your choice will affect so many aspects of your business – how you run it, how taxes are handled, your level of personal responsibility, and more, consider seeking advice from trusted legal and accounting professionals. Each situation is unique in some way, so it is helpful to review the pros and cons of your specific situation before moving forward.

Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author and mother of four. She is the Founder and CEO of CorpNet.com, a trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states.

About NMSBDC

The Small Business Development Center at Western New Mexico University provides assistance to anyone interested in starting, improving or expanding a small business. SBDC specializes in free, one-on-one confidential counseling and low-cost training. Call 575-583-6320 for an appointment with a business advisor or send an email to [email protected] More information can be found at:

http://www.nmsbdc.org/silver-city.aspx.

– Silver City office: Watts Hall, Corner Swan and Hwy 180

– Deming Office: Mimbres Valley Learning Center, 2300 E Pine Street

About Leah Albert

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