When you form a business you can choose to use one of several legal structures for your company. Each structure has different advantages and will affect how the company is taxed and how liable the owners are when the business faces debt or a lawsuit.
In Georgia people that start a business with more than one owner often form one of several types of partnerships. Each type is detailed below.
Types of Partnerships: Liability & Tax Considerations
For tax purposes, partnerships are considered pass-through entities. This means the profits and losses from the partnership are reported on the owners’ personal income. The IRS has more information on how partnerships handle federal taxes.
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 the business takes on a debt, such as a loan or lawsuit, then those 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 Georgia are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
The simplest partnership structure, a general partnership offers no liability protection. The partners (called general partners) are liable for all the debts of the GP regardless of how the debts were incurred or which partner was responsible for incurring them.
As mentioned above, all partnerships in Georgia are considered pass-through entities. Thus the general partners have to report the income or losses sustained by the business on their individual tax returns.
Limited Partnership (LP)
In Georgia, limited partnerships allow businesses to be created with two partnership levels, general partners and limited partners. The limited partners benefit from being protected from liability for the debts of the business beyond their own personal investment in it. The general partners, however, are still personally responsible for all the partnership debts.
General partners, however, are authorized to make the major decisions regarding how the partnership will be ran. This partnership is popular with companies that are trying to raise money because investors can invest freely, knowing they are only liable for the money, equipment, or assets they invest.
Like GPs, LPs are also considered pass-through entities. Each partner (whether a limited or general partner) has to report his or her share of the profits of the business on both the state and federal 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 Georgia
After deciding between a general partnership and a limited partnership you will need to take a couple of steps to protect your business name and comply with state law before opening for business. The state also provides detailed instructions for limited partnerships, summarized below.
Step 1: Select a business name
All businesses in Georgia are required to register their business name with the Secretary of State (SoS). In order to do so you will first need to search the SoS database to see if your business name is available.
If you are forming an LP you will need to include that designation in your business name. So, if you want to start a bakery as a limited partnership called Tasty Treats, you will need to search for Tasty Treats LLP in the SoS database.
Step 2: Register business name
Once you have confirmed the availability of your business name you will need to reserve the name to prevent another business from using it. You can reserve your name online through the Secretary of State’s online database or you may do it by mail.
Step 3: Complete required paperwork
General Partnerships (GP) – In Georgia, there is no formal filing requirement for general partnerships. All you need is an agreement to run the business with the other partners and you are set. It’s always recommended that the partners write a document called a partnership agreement. This document details how the partnership will be ran, what each partner is responsible for doing, and more. This document isn’t required by law, but it is often very useful.
Limited Partnerships (LP) –In Georgia, limited partnerships must prepare and file a Certificate of Limited Partnership with the Secretary of State in order to do business within the state.
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 and taxes from the state in order to operate.
Step 5: Get your day to day business affairs in order
After registering your business name and filing the appropriate forms with the Secretary of State, you are free to do business in Georgia. Consider doing the following in order to get your business up and running:
- Open a bank account for your business
- Set up a website for the partnership
- Get insurance to protect your business assets
- Consider getting a partnership agreement written, if you haven’t already
LegalZoom can help you set up a limited partnership or limited liability partnership online. 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.