Delaware is one of the most popular states in the country to start a business. When forming a business, you can choose from different legal structures that offer specific advantages. If you are forming a business with other people, partnerships are popular choices. Partnerships allow flexibility and control while giving the partners a way to share business revenue effectively and with little government interference.
Types of partnerships: Liability & tax considerations
From a tax standpoint partnerships are almost always pass-through entities. This means that the income from the business is accounted for on the partners’ personal income taxes. Keeping taxes simple is one advantage of a partnership. The IRS has information on federal tax requirements for partnerships.
In addition to tax considerations, personal liability is the other important topic to consider when forming a business. Liability refers to how many of your personal assets are able to be seized when the business has to settle a debt. The reverse is true as well, meaning your business assets may be used to settle your personal debts.
Note: While most partnerships in Delaware are not subject to income taxes, they are required to file yearly state income tax returns and are required to pay an annual tax to the Secretary of State. Partners that are Delaware residents file regular income tax returns while non-resident partners have a special tax form to fill out in order to properly account for the income they earn from their Delaware partnership. This can all be done online at the Delaware Department of Revenue’s website.
The types of partnerships offered in Delaware are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
Liability of partners: The classic business partnership, a general partnership allows flexibility and simplicity of operation, but doesn’t protect the partners’ assets from the company’s liabilities. This means that any debts the business incurs, such as from a lawsuit, can spill over into the owners’ personal assets. Your house, cash, or retirement accounts could be seized to pay a business debt, for example.
Tax overview: The profits and losses from every Delaware GP are accounted for on the partners’ tax returns that they file individually with the state. A franchise tax also applies to all general partnerships.
Limited partnership (LP)
Liability of partners: A very common type of partnership, limited partnerships allow for limited partners whose liability is limited to the amount of their investment in the partnership. General partners are still liable for all the LPs debts.
Tax Overview: In Delaware, owners of LPs pay taxes in exactly the same way as owners of GPs in Delaware. A franchise tax applies to all limited partnerships.
Limited liability partnership (LLP)
Liability of partners: The choice of professionals across the country, limited liability partnerships limit the partners’ liability to the extent of their investment in the partnership and shields them from liability incurred by other partners. These partnerships are common among professionals that commonly incur liability, such as doctors and lawyers but are less common in other types of professions.
Tax overview: LLPs are taxed the same way as a GP with an additional franchise tax fee for each partner, with the total fee never to exceed $120,000. Check with the Department of State for the most recent fees.
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 Delaware
If you decide to form a partnership in Delaware, there are a few crucial steps to go through in order to properly create the partnership.
Step 1: Select a business name
Check with the Department of State to search their database of business names to see if the name you want to use is available. You can’t use a name that has already been registered by another company because this would be too confusing to the public. If your name is available, you can register it with the Department of State. The registration process requires a fee, check with the Department of State for the most current fee.
The type of partnership structure you’ve chose (except for a general partnership) must appear in the formal, legal name of the business. For example, a limited liability partnership named QRS Metal Work could be called QRS Metal Work, LLP.
Step 2: Ensure you have a registered agent
Delaware requires that you have a registered agent within the state who is authorized to do business there and who has a physical address within the state A registered agent acts as the official contact for the business in legal records. If the company is served sensitive court documents, the documents will be served to the registered agent. Businesses within Delaware may act as their own registered agent or use a third party company to serve as their agent.
Step 3: Fill out all required forms
Fill out the new entity formation forms located here and file the paperwork with the Delaware Department of State – Division of Corporations (DoC) along with the current filing fee.
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. Even if you are not planning on having employees, an EIN can be very useful (or even required) when opening a business bank account.
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
Once you have your appropriate paperwork back from the DoC, you can start doing business in Delaware. Consider setting up the following items for your new business:
- A business bank account
- A permanent address for the business
- A web address for your business
- Insurance for your company
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.