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. Louisiana offers four types of partnerships, detailed below.
Types of Partnerships: Liability and Tax Considerations
Partnerships are considered pass-through entities, meaning the owners of Louisiana partnerships pay taxes on the business revenue using their personal tax returns. The partnership itself files no tax return, but some types are required to file an annual report. The Internal Revenue Service offers information on some of the 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 Louisiana 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
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 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 operations and limited partners are more like silent investors
- Taxed as a pass-through entity like a general partnership but with additional fees and tax requirements
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 Louisiana
To properly create a partnership, you will need to prepare your business name, register it, and file the correct paperwork.
Step 1: Select a business name
Decide on a name that will be appealing to the kind of customers you want your business to attract. The name you choose should be catchy and reflect your ideas about what the business is. Business names must also include the entity type (LLP, LP, etc.).
Step 2: Register the business name
Look through the Louisiana's Business Database once you and your associates decide on a name. If a name has been registered you can’t easily use it for yourself. Afterwards, protect your new business name by registering it with the Louisiana state government. Once the name has been reserved you don’t need to worry about it being taken while you complete the rest of the business creation process.
Step 3: Complete required paperwork
In Louisiana, partnerships are required to pay a filing fee and file in the required paperwork. Foreign businesses sometimes have further and/or different requirements to meet.
General Partnerships (GP) – GPs may need to register their business name with the state. It is common for the partners to write a partnership agreement, a document that details the rights and responsibilities of each partner. This agreement will help settle possible disputes and should be kept on file with the business.
Limited Partnerships (LP) – LPs must file a Partnership Registration Form with the state.
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 typically need an Employer Identification Number (EIN) from the IRS. An EIN can be used to start a business bank account, so it is useful for partnerships that don’t hire employees.
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 your partnership has been legally formed, you should check the following list to make sure the following important items are completed.
- Open a bank account in the business’s name
- Get insurance to cover your business assets
- Check to see if you need to set up a registered agent: a person that receives legal documents for the partnership
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.