When you start a business you can choose from several types of legal structures. The structure you choose determines how the business will be taxed, if you are personally responsible for the business’ debt and more.
If you are going into business with others, you may consider forming a partnership. Partnerships offer simple tax requirements and, in some cases, liability protection. Kansas offers three types of partnerships, detailed below.
Types of Partnerships: Liability and Tax Considerations
Partnerships are typically taxed as pass-through entities. This means the owners of partnerships pay taxes on the business income using their personal tax returns while the partnership itself doesn’t pay any taxes.
There are few state tax requirements, but in Kansas partnerships may have to file an annual report. The Internal Revenue Service offers information on the federal tax requirements for partnerships.
Personal liability is the other important topic to consider when forming a business. Personal liability refers to how personally responsible the owners are for the business’ debts and obligations. Some partnership structures offer liability protection for their owners, allowing them to shelter their personal assets from the business. For example, if your partnership loses a lawsuit and has to pay a huge settlement, personal liability will help protect your house, cash, and savings from the settlement.
This protection will not apply in all cases, such as if you owe taxes, commit fraud, or do something that violates the partnership’s liability protection.
The types of partnerships offered in Kansas are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
The simplest form of a partnership, the general partnership offers no liability protection but also isn’t hindered by very many laws, offering maximum freedom to do business as you wish.
No liability protection, each partner is personally liable for all of the company’s debts
Your personal assets, such as your home or cash, can be seized to settle business debts
Income from the business passes through to your personal income, where it is taxed as income
Exempt from a lot of rules regarding how the business should be named, ran, and maintained—no need for lots of complicated paperwork
Limited Partnership (LP)
Limited partnerships are similar to general partnerships, but offer two levels of partners: limited and general partners.
- Limited partners are not allowed to manage the day to day operations of the business, but enjoy personal liability protection
- Limited partners are only liable for the money they’ve invested into the company
- General partners are fully liable for the business debts, but they control the day to day operations
- Taxed as a pass-through entity, like a general partnership
- Very popular with partnerships that want to attract outside investors that typically act as limited partners, protecting them from the company’s debts and obligations
Limited Liability Partnership (LLP)
In a limited liability partnership partners can’t be held liable for other partners’ mistakes, errors, or outright fraud. These types of partnerships are very popular with professionals that expect to take on a lot of liability risk (typically as the result of lawsuits), such as doctors and lawyers. For example, if three doctors start an LLP and one of them is sued for malpractice and loses a costly lawsuit, the other doctors won’t be personally liable to pay off that debt.
- Similar to a general partnership, but each partner is only liable for their investments like a limited partner in an LP
- Each partner is protected from the other partners’ debts and obligations
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 Kansas
Once the decision to form a Kansas partnership has been made, the partners must work with state agencies to properly create the business.
Step 1: Select a business name
Partners must sit down with each other and discuss names that will appeal to their target customers and represent their partnership effectively. Business names typically must have the entity designation in their name (LP, LLP, etc.). Certain other guidelines must be followed.
Step 2: Register the business name
Once a name has been chosen, you must search the Kansas Business Database to make sure it hasn’t been taken already. Then protect your new business name by registering it with the Kansas state government. Reserving your business name protects it from being taken while the rest of the process moves forward.
Step 3: Complete required paperwork
In Kansas, most partnerships are required to register with the state, pay a filing fee, and file the required paperwork.
General Partnerships (GP) – GPs don’t need to register but may file with the state if desired. Many GPs create a partnership agreements, or a written document outlining how the partnership will be ran including detailing the partners’ responsibilities, rights, and privileges. You can register this document with the state and it is recommended, a registered agreement may resolve disputes in the future.
Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership to operate in Kansas.
Limited Liability Partnerships (LLP) – LLPs must turn in an Application for Registration of an LLP with the state.
Step 4: Determine if you need an EIN, additional licenses or tax IDs
Partnerships with employees often need an Employer Identification Number (EIN) from the IRS. Even if you are not going to hire employees, EINs are useful for opening business bank account, entering contracts, and filing some tax documents. Further, some partnerships need additional licenses from the state in order to do business. Additional taxes may also be needed.
Step 5: Get your day to day business affairs in order
Before opening your doors you should:
- Double check to make sure any registered agent requirements are met
- Ensure your business accounts are established and accessible
- Fully insure your business and its assets
- Set up a physical address at which to do business
- Put together a tax plan with a tax professional
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.