Connecticut offers a wide variety of opportunities for small business owners. If you are interested in starting a business with at least one other individual, you can choose different legal structures for your business. One popular structure is a partnership. In Connecticut, business owners can choose from four different partnership structures.
Types of partnerships: Liability & tax considerations
If you decide to form a partnership in Connecticut, you will be required to file an annual report for the business with the IRS. This report is required even though a partnership is considered a pass-through entity for federal tax purposes and you will be required to report the income generated by the business on your personal income tax returns.
Although the type of partnership you choose in Connecticut does not have an effect on your federal income taxes, it may have an effect on the tax status of the business within the state.
Personal liability is the other important topic to consider when forming a business. Personal liability is a legal term that explains how closely your personal debts and assets are tied up with your business. If you have no personal liability, then none of your business’s debts are counted against your personal assets, in effect the business is totally separate from you. This means if you have to settle a business debt, such as a loan or lawsuit, then the creditors can’t seize your home, cash, or other personal assets to settle the debt. While no legal structure gives you complete liability protection, some grant more options than others.
The types of partnerships offered in Connecticut are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
Liability of partners: In a general partnership all of the partners are personally responsible for the debts incurred by the business. There is no personal liability protection, meaning all of the partners are personally accountable for all business debts. If you’re a partner in a GP, then all of your property, cash, and savings is able to be seized to settle the company’s debts.
Tax overview: GPs are considered pass-through entities in Connecticut. This means that the partners are responsible for reporting the income generated by or lost by the partnership on their individual tax returns.
Limited partnership (LP)
Liability of partners: A limited partnership is a business made up of at least one general partner and one limited partner. The general partner is personally responsible for the debts of the business but the limited partner is only responsible for the business debts that are equal to his or her investment in the company. For their trouble, the general partners are given full authority to run the business while the limited partners do not.
The LP structure is popular with new companies that need to raise startup money quickly. The limited partners can invest knowing they aren’t going to be responsible for more than their invested share if the company faces creditors.
Tax overview: LPs are considered pass- through entities. As a result, Connecticut business owners with a LP must report the profits earned or the losses sustained by the business on their personal tax returns.
Limited liability partnership (LLP)
Liability of partners: Limited liability partnerships provide liability protection for a partner that extended to the actions of the other partners. This means that each partner is only legally responsible for his or her own actions.
Tax pverview: As a pass-through entity, each partner is responsible for reporting the income generated by the partnership on his or her personal tax returns.
Limited liability company
If you need additional taxation choices or greater protection from personal liability you may want to consider forming a limited liability company (LLC). The LLC business structure combines many of the advantages of partnerships while offering greater flexibility in tax structures. On the downside, they often require more effort to maintain than a partnership but even then, they are known for their simplicity.
How to form a partnership in Connecticut
After carefully considering your options, there are a number of steps you will need to take to get your business up and running in Connecticut. Luckily, the state has created an online guide to help business owners get started.
Step 1: Select a business name
Before you can select a business name for your company, you need to verify that the name is available for use in Connecticut. No two companies should share a name, as this is very confusing for the public.
You can search for available names and register your own at the Secretary of State website. If your business will be operated as anything other than a general partnership, you must include the appropriate designation (LP, LLP, LLC) within the company name.
Step 2: Register the business name
In Connecticut, all businesses operating under a fictitious business name or a “dba” must register the business name with local/municipal clerk’s office.
Step 3: Complete required paperwork
General partnerships (GP): In Connecticut, business are not required to register if they are going to operate as a general partnership. You are, however, required to register the business name with the local clerk’s office and obtain a state tax id number.
Limited partnerships (LP): In order to form a LP in Connecticut, you must file a Certificate of Limited Partnership with the Secretary of State.
Limited liability partnerships (LLP): In Connecticut, in order to form an LLP you must file a Certificate of Limited Liability Partnership.
After registering your business name and filing the appropriate forms with the Secretary of State, there are a couple of additional steps you need to take before you can legally operate your business in Connecticut.
All businesses operating as a partnership in Connecticut must obtain a state tax id in order to do business within the state. Depending on the industry, you may also be required to apply for a trade or occupational license.
Step 4: Determine if you need an EIN, additional licenses, or tax IDs
Partnerships with employees should obtain an Employer Identification Number (EIN) from the IRS. Additionally, some businesses require additional licenses from the state in order to operate. Further taxes may be required as well, depending on your business.
Step 5: Get your day-to-day business affairs in order
After you’ve complied with all of the formal filing requirements you should take a couple of additional steps to get your business off to a smooth start:
- Business mailing address
- Website for the business
- Social media accounts
- Business banking and credit card accounts
Ready to start a partnership? LegalZoom will help you choose which one may be right for you. We can also file the paperwork to form your business, help you find a registered agent, and get you in touch with an attorney or tax professional.