Maryland is a great state to be a business owner in. With the highest median income of any U.S. state, there are plenty of customers for almost every business type. If you are forming a business with other people, you may consider forming a partnership. There are different types of partnerships available in Maryland, this article will take a look at the advantages of each type.
Types of partnerships: Liability & tax considerations
When it comes to paying taxes, Maryland doesn’t commonly require the partnership to pay separate income taxes. The income from the partnership passes to the owners’ personal incomes. However, Maryland may require some additional forms from certain partnerships.
Check out the Internal Revenue Service for further information regarding federal taxes and partnerships.
Personal liability is the other important topic to consider when forming a business. Liability refers to how many of your personal assets are able to be seized when the business has to settle a debt. The reverse is true as well, meaning your business assets may be used to settle your personal debts.
The types of partnerships offered in Maryland are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
While general partnerships are a good choice to start out a partnership, they do offer liability protection to their partners. Furthermore, GPs are wholly pass-through entities, meaning the business income simply passes to the owners’ personal income and is taxed accordingly. Each partner pays his or her share of the partnership revenue taxes on his personal income tax return.
Limited partnership (LP)
Limited partnerships are another type of partnership. LPs have limited partners whose involvement in the partnership is often minimal and who are not accountable for partnership liabilities beyond their monetary investment in the LP.
Both general and limited partners in LPs pay tax on the revenue they derive from the partnership on their personal returns. This tax structure is the same as a general partnership. Like a general partnership, an LP is also considered a pass-through entity.
Limited liability partnership (LLP)
LLPs are typically general partnerships that offer protection to the general partners from some partnership debts. LLP partners aren’t liable for the company’s debts that they didn’t create themselves, although there are exceptions. This means that if one partner becomes the target of a lawsuit, and loses, the other partners will not be personally liable for his debts. LLPs are popular with professions that expect a high level of liability risk, such as doctors and lawyers.
While liability shielding may be different, LLPs and GPs share the same pass-through tax structure.
Limited liability limited partnership (LLLP)
Like an LP, limited liability limited partnerships offer general partners protection from LLLP liabilities they didn’t create themselves. LLLPs limited partners are only liable up to the amount of their investment in the LLLP. LLLPs are typically the most highly regulated type of partnership, but they remain pass-through entities just like the other partnership types.
Limited liability company
For those business owners interested in more liability protection, a limited liability company (LLC) may be worth considering. LLCs are quasi-corporate business entities that offer greater liability protection, but subject owners to greater government oversight and higher setup costs than partnerships.
How to form a partnership in Maryland
To properly form a Maryland partnership, there are a number of important steps that have to be taken before the business can open its doors.
Step 1: Select a business name
Picking a name can be a fun, challenging process. Names should be appealing to potential customers, should be catchy, and should reflect the owners’ perception of their business. Business names must also have the entity designation in their title, such as LP, LLP, or LLLP.
Step 2: File trademark on business name
No two businesses can register the same business name, so you’ll need to look through Maryland’s Business Database to see if your desired business name is available. Then protect your new business name by registering it with the Maryland 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 Maryland, most partnerships are required to register with the state, pay a filing fee, and file the required paperwork.
- General partnerships (GP): GPs may file with the state if desired. If you create a partnership agreement for the partners of the GP (which is highly recommended), you may file it with the state as well. The partnership agreement is a document that explains how the partnership will be run.
- Limited partnerships (LP): LPs must file a Limited Partnership Certificate with the state in order to operate in Maryland.
- Limited liability partnerships (LLP): LLPs must require a Certificate of Limited Liability Partnership to be on file with the state.
- Limited liability limited partnerships (LLLP): LLLPs are limited partnerships that elect to be formed or reformed as limited liability entities. The process to accomplish this is not well documented, and entrepreneurs are encouraged to contact the Maryland Secretary of State directly with questions regarding business formation.
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 run and includes details such as adding new partners, changing the business, shutting the business down, or dealing with partners that 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