When you form a business you can choose from several legal structures for your company. Each structure offers different advantages and drawbacks. When several people are opening a business together, they often form a partnership. There are four types of partnerships in Hawaii.
Types of partnerships: Liability & tax considerations
Partnerships are considered pass-through entities, meaning the profits and losses from the company passes through to the owners’ personal income. The partnership itself doesn’t file any tax returns. Although the IRS considers partnerships pass-through entities they do require partnerships to submit an annual report detailing the profits earned or losses sustained by the business.
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 Hawaii are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
General partnerships do not provide any personal liability protection. If you form a general partnership you could be held personally responsible for the actions of the other partners and for any debts incurred by the business.
Considered pass-through entities, general partnerships pass their profits and losses on to their owners.
Limited partnership (LP)
Limited partnerships create two partnership tiers – general partners and limited partners. The limited partners are protected from liability for the business debts (beyond what they’ve invested) and the actions of the general partners but the general partners are personally liable for business debts and the actions of any partners.
LPs are also pass-through entities. As a result, any income generated by the business must be reported on the partners’ tax returns.
Limited liability limited partnership (LLLP)
Like LPs, limited liability limited partnerships allow partnerships to set up different roles for general partners and limited partners. In fact, an LLLP is very similar to an LP, the major difference is that each partner is only responsible for their own actions. This structure is common in partnerships that are formed around professions that incur a high risk of liability such as medical and legal professions.
All partnerships are treated as pass-through entities in Hawaii, thus, partners must report their share of business income or losses on their tax returns.
Limited Liability Partnership (LLP)
In an limited liability partnership, each partner is legally and financially responsible only for his or her personal actions within the business. Like all of the other partnerships previously mentioned, LLPs are also pass-through entities for state and federal tax purposes.
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 Hawaii
After deciding between the four partnership types available in Hawaii, you will want to take the following steps to get your new business started.
Step 1: Select a business name
Any business that operates in Hawaii is required to register their business name with the Department of Commerce and Consumer Affairs. Before you can register your name you will need to ensure that the business name is available, you can do so by calling the department or using their online database.
It is important to remember the type of partnership you want to create when you are searching for your business name because you will be required to include the whole word or abbreviation (GP, LP, LLP, LLLP) in your business name.
Step 2: Register business name
After you have confirmed that your name is available, you will need to register it with the Department of Commerce and Consumer Affairs. The easiest way to do this is through the online system.
Step 3: Complete required paperwork
In Hawaii, all of the necessary registration documents can be completed for your partnership using their website. The details for each legal structure are listed below.
General partnerships (GP): In Hawaii, general partnerships must be registered with Department of Commerce and Consumer Affairs Business Registration Division by filing a Registration Statement for Partnership FORM GP-1 and paying the appropriate fees.
Limited partnerships (LP) and limited liability limited partnerships (LLLP): In Hawaii, limited partnerships and limited liability limited partnerships must register with the Department of Commerce and Consumer Affairs Business Registration Division by filing a Certificate of Limited Partnership FORM LP-1 and paying the appropriate fees.
Limited liability partnership (LLP): In Hawaii, limited liability partnerships must register with the Department of Commerce and Consumer Affairs Business Registration Division by filing a Registration Statement for Partnership FORM GP-1 and a Statement of Qualification FORM LLP-1 and paying the appropriate fees.
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. An EIN is commonly required to open a bank account for the business, so it is usually a good idea to get one even if you aren’t hiring employees.
Additionally, some businesses require additional licenses from the state in order to operate. Additional taxes may be required as well, depending on your business.
Step 5: Get your day-to-day business affairs in order
After registering your business name and filing the appropriate forms with the Department of Commerce and Consumer Affairs, you are legally able to do business in Hawaii. Consider completing the following things to get your business up and running:
- Opening a bank account for the business
- Getting insurance in place to protect your company’s assets
- Creating a website for your company
LegalZoom will help you choose which partnership 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.