How to Form a Maine Partnership
How to Form a Maine Partnership
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. Maine offers three types of partnerships, detailed below.
Types of Partnerships: Liability & Tax Considerations
Partnerships are considered pass-through entities, meaning the owners of Maine 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 the federal taxation requirements for partnerships.
Personal liability should be considered 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 Maine 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 offers 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 personal 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 allow the owners to organize into two different types 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
How to Form a Partnership in Maine
Once you decide to move forward with a partnership, there are some steps that you need to take before the business can open its doors to clients.
Step 1: Select a business name
Take the time to think of a name that will bring in customers and that reflects their business ideals. The name should be catchy, but also straightforward. Additionally, businesses are generally required to have the entity type in their official business name. For example a limited partnership named ‘Smith & Jones Attorneys At Law’ would have to be called ‘Smith & Jones Attorneys At Law, L.P.’ or something similar.
Step 2: File trademark on business name (optional for GPs)
Search the Maine’s Business Database to see if your name has already been registered by another business. If the name is available, you can register the business name to prevent others from using it. You’ll register the name with the Maine Secretary of State.
Step 3: Complete required paperwork
In Maine, most partnerships are required to register with the state by sending in filing fees & relevant paperwork. The details for each type of partnership are listed below.
General Partnerships (GP) – GPs don’t need to register with the Secretary of State but can register their business name as mentioned above.
Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership with the Secretary of State to operate in Maine and pay any required fees.
Limited Liability Partnerships (LLP) – LLPs must register a Certificate of Limited Liability Partnership with the state.
Step 4: Determine if you need an EIN, additional licenses or tax IDs
If you plan on hiring employees, you’ll need to get an Employer Identification Number (EIN) from the IRS. Even if you aren’t hiring employees, an EIN is helpful for opening business bank accounts, credit cards, and more. It’s highly recommended you get one from the IRS.
Some partnerships need additional licenses from the state in order to do business. For example, plumbers, electricians, and other types of contractors usually need to be licensed to do business. Additional taxes may also be needed.
Step 5 – Get your day to day business affairs in order
Once the Secretary of State has approved your paperwork and sent you a certified, stamped copy of the paperwork back, you’re able to do business. Here are a few things to consider as you get started with your business:
- You’ll need to open a bank account in your business’s name to keep your liability protection in tact (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 ran and includes details such as how to deal with partners that leave, adding new partners, changing the business, or shutting the business down.
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.