When you start a business, you can choose from several types of business structures. The structure you choose determines how the business will be taxed, if you are personally responsible for the business’ debts, and more.
If you are going into business with others, you may consider forming a partnership. Partnerships offer simple tax filings and, in some cases, liability protection. Kentucky offers four types of partnerships, detailed below.
Types of partnerships: Liability & tax considerations
While income from the partnership is typically taxed on the partners’ personal returns, some Kentucky partnerships may be required to file an annual report. The Internal Revenue Service offers a guide to a few federal taxation 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 Kentucky 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. Some aspects to be aware of:
- 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, run, 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 who 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 limited partnership (LLLP)
In a limited liability limited partnership, you find a blend of LP and LLP advantages. An LLLP has both general and limited partners, but they are all protected from each other’s debts, errors, and legal obligations. Like an LLP, the LLLP is popular with high-risk professions that also seek outside investment.
- Similar to an LLP where each partner is not liable for the others’ liability
- Two types of partners, general and limited partners, in which the general partners manage day-to-day operations, and limited partners are more like silent investors
- Taxed as a pass-through entity like a general partnership
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 Kentucky
When the decision to move forward with creating a partnership has been made, there are a number of steps that must be taken before opening your partnership’s doors to clients.
Step 1: Select a business name
Coming up with a business name can be a challenging, but often rewarding process. A business name should be memorable and appeal to customers while also instilling pride in the business owners. The entity designation for most partnerships must be included in the name (LP, LLP, etc.).
Step 2: Register the business name
Search the state’s Business Database once you’ve come up with a name, in order to ensure it isn’t being used by another business. Then protect your new business name by registering it with the Kentucky Secretary of State. Reserving your name prevents others from legally using your business name.
Step 3: Complete required paperwork
In Kentucky, most partnerships are required to register with the state, pay a filing fee, and file the required paperwork. Foreign businesses may have additional and/or different requirements to meet.
- General partnerships (GP): GPs typically don’t need to register with the Kentucky state government, but will need to register an assumed business name. Additionally, partnership agreements should be recorded in writing if possible. A partnership agreement is a document that details the rights and responsibilities of the partners.
- Limited partnerships (LP): LPs must file a Certificate of Limited Partnership to operate in Kentucky.
- Limited liability partnerships (LLP): Kentucky LLPs must turn in a Statement of Qualification of an LLP with the state.
- Limited liability limited partnerships (LLLP): To create a Kentucky LLLP, partners must file a Certificate of Limited Partnership in which they elect to take LLLP form.
Step 4: Determine if you need an EIN, additional licenses, or tax IDs
Partnerships often need an Employer Identification Number (EIN) from the IRS. Even if you aren’t going to hire employees, an EIN is important for opening bank accounts in the partnership’s name, entering some contracts, and more.
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
Once all the government paperwork is behind you, it’s time to make sure you’ve set up important business basics:
- You’ll need to open a bank account in your business’s name to keep your liability protection intact (if your partnership type offers liability protection).
- You’ll need a physical address where the business can receive mail and legal notices.
- Make sure you have a partnership agreement on hand. This is a document that outlines how the partnership will be run and includes details such as adding new partners, changing the business, shutting the business down, or dealing with partners who leave.
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.
Find out more about Forming a Partnership