How to Form a Delaware Partnership

How partnerships impact taxes and liability

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.

It’s important to note that 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 Division of Revenue’s website.

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.

Types of Delaware Partnerships

These are the types of partnerships offered in Delaware and how each impacts the partners’ liability and tax classifications. 

General partnership (GP)

A general partnership is the most common type of partnership. This structure allows flexibility and simplicity in your operation, but doesn’t protect the partners’ assets from the company’s liabilities. Any debt the business takes on, including debts from lawsuits, can spill over into the partners’ personal assets. Your house, savings, and retirement funds can be used to pay business debts if the partnership defaults.

From a tax standpoint, the tax situation is simple. The profits and losses from every Delaware GP are accounted for on the partners’ tax returns that they file individually with the state. You’ll also have to pay the franchise tax each year, which comes to $300 from each partner.

Limited partnership (LP)

Limited partnerships strive to further reduce liability for some of the partners involved. The structure breaks the partnership into two categories: general partners, who are primarily responsible for running the business, and limited partners, who invest in the business but don’t actively run the operation. 

The general partners bear full liability for any debts incurred. The limited partners’ liability is limited to the amount of their investment in the partnership. General partners are still liable for all the LP's debts.

In Delaware, owners of LPs pay taxes in exactly the same way as owners of GPs. A franchise tax applies to all limited partnerships.

Limited liability partnership (LLP)

Limited liability partnerships limit the partners’ liability to the extent of their investment in the partnership and shield them from liability incurred by other partners. These partnerships are common among professionals, such as doctors and lawyers, but are less common in other types of professions.

LLPs are taxed the same way as a general partnership. Each partner accounts for their portion of the profits and losses when filing their personal taxes with the state. However, each partner must pay an additional franchise tax fee with a total not to exceed $200,000. Check with the Department of State for the most recent fees.

How to form a partnership in Delaware

If you decide to form a partnership in Delaware, there are a few steps you’ll need to take to set things up correctly. These are the steps most businesses will need to take to formalize their partnerships.

1. Select a business name

You’ll need to select a business name that represents your brand and your company. The name should be easy to remember and, ideally, help convey your brand’s personality. Think about your values and what you want customers to think about when they see your business name as you start. You can use LegalZoom’s free Business Name Generator if you need suggestions.

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 online with the Department of State. 

The type of partnership structure you choose (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.

2. Choose 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 with sensitive court documents, the documents will be served to the registered agent. Businesses headquartered in Delaware may act as their own registered agent or use a third-party company to serve as their agent.

3. Fill out all required forms

You’ll need to make your partnership official with the state by filling out the necessary forms with the Delaware Department of State’s Division of Corporations (DOC). The forms you need to fill out depend on the type of partnership you form.

• General partnerships: You’ll need to file a Statement of Partnership Existence with the DOC. The statement provides information about the business, the partners, and the company’s registered agent.
• Limited liability partnerships: LLPs must file a Statement of Qualification for LLP which proves to the state that the partnership meets all requirements to function as an LLP. 
• Limited partnerships: These partnerships must file a Certificate of Limited Partnership that provides basic information about each partner and the business.

The filing fee for each document is $200. 

4. Create a partnership agreement

Delaware doesn’t require partnerships to file a formal agreement. However, creating one is still a good idea. Your partnership agreement outlines how you’ll run the partnership, the key responsibilities of each partner, and other similar information.

Take some time to develop your agreement before formalizing your business. At a minimum, you’ll want to include: 

• The roles and responsibilities of each partner
• The financial and non-monetary contributions each partner made
• Instructions for allocating the business’s profits and losses
• The management structure for the partnership
• Instructions for recordkeeping and documentation
• Voting rights for each key stakeholder
• Terms and conditions for dissolving the partnership
• Terms and conditions for selling a share of the partnership

The document can grow and change as your business grows. But creating an agreement from the outset can help you and your partners stay on the same page.

5. Determine if you need an EIN, additional licenses, or tax IDs

An employer identification number (EIN) helps the IRS identify your partnership for tax purposes. You can request an EIN for free through the IRS’ website, or an online legal services provider like LegalZoom can help you apply for an EIN so your business stays compliant.

Many banks also require businesses to have an EIN before they open a business bank account. Try to request this number as soon as possible. 

You may also need to apply for additional business licenses from Delaware before you can open your doors. Most partnerships need a Delaware business license. This is available through the Division of Revenue. However, depending on your industry and your location, you may need county or city-specific licenses as well. Look into the regulations in your area to see what types of licenses you need.

6. Be ready to file state and federal taxes

Delaware partnerships typically need to pay both federal and state taxes. Federal taxes will be filed with the IRS, while state taxes will be filed with Delaware. The types of state taxes you’ll pay will depend on your business, the industry you operate in, and whether you have employees. Typically, you’ll need to pay the following:

• Franchise tax: The Delaware franchise tax is $300 per year and must be paid by all general partnerships, limited partnerships, and limited liability partnerships.
• Delaware partnerships tax return: Partnerships must also fill out and file a Delaware partnerships tax return (Form PRT-RTN) to report their income and expenses. 
• Withholding taxes: If your partnership has employees, you’ll need to pay withholding taxes each year. 

The costs of forming a Delaware partnership

Forming a Delaware partnership will cost you at least $200, regardless of the type of partnership you form. Here’s a quick breakdown of the costs you’ll likely pay: 

• Statement of partnership existence fee: $200
• Statement of qualification fee: $200
• Annual report fee: $200
• Registered agent fee: $50-$150
• Name reservation fee: $75
• Franchise tax fee: $300

What to do after forming your Delaware partnership

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:

• Open a business bank account. Your partnership should have a dedicated business bank account that you and your business partner use to cover all business-related expenses and to manage your finances. You’ll likely need to use your EIN to open the business bank account, so be sure you have your number in place before going to the bank.
• Apply for a domain name. More than half of consumers visit business websites before making a purchase. Once you’ve registered your partnership with the state, apply for a domain name. Try to keep your domain name as close to your business name as possible so consumers know that the site is yours and not a similar competitor. 
• Invest in business insurance. Partnerships can protect you and your partners from liability, but you still need business insurance to fully protect your interests and your company. Consider investing in professional liability coverage, property insurance, and other similar policies. You’ll want to shop around for quotes to find the best coverage for your needs.

How LegalZoom can help with your Delaware partnership 

Forming a Delaware partnership involves choosing a good business name, picking the right partnership type, and making sure you’re in full compliance once your business is up and running. 

LegalZoom can help you make sure your partnership is set up in a way that reflects your business’s goals and needs while also helping you stay in compliance once you’re up and running. 

If you choose to form an LLC with your partners, LegalZoom can take the stress out of the process and guide you through each step. 

Delaware partnership FAQs

Can an LLC be a partner in a Delaware limited partnership?

Yes. An LLC can be one of the partners in a limited partnership. This can help protect the partners in the LLC from personal liability if anything happens with the business.

Does Delaware require partnership agreements?

Delaware does not require businesses to file partnership agreements. However, creating one can be beneficial since these agreements outline the roles and responsibilities of each partner. 

Can a Delaware partnership have only one partner?

No. Delaware partnerships are formed between two or more individuals. If you’re interested in forming a business on your own, forming a limited liability company or a sole proprietorship may be a better choice. 

What are the disadvantages of creating a Delaware partnership?

The biggest disadvantage of creating a Delaware partnership is the fees you’ll pay to get things up and running. You may find it cheaper to form a partnership in other states, but since Delaware’s laws and tax requirements are largely considered beneficial to businesses, many business owners find the more expensive fees easy to justify.

Mary Wenzel, J.D., contributed to this article.