Michigan is part of the United States’ industrial heartland. If you’re interested in starting a business within the state, you may want to consider forming a partnership with one or more of your business associates. In Michigan you can choose from three types of partnership structures, each with different advantages. This article compares each type of partnership.
Types of Partnerships: Liability & Tax Considerations
The major differences between each type of partnership deal with how the partnership will be taxed and how it handles personal liability for the partners. For tax purposes, partnerships in Michigan are treated as pass-through entities, meaning the income the company earns passes through to the partners’ personal income. The partnership doesn’t file a tax return, like a corporation would do, instead the money earned is treated like personal income for the partners.
There aren’t any tax requirements, such as additional paperwork, for partnerships with the state of Michigan and the Internal Revenue Service has information about partnerships and federal taxes.
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. Some partnerships offer no liability protection, others offer different levels of protection.
The types of partnerships offered in Michigan 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
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 Michigan
Once you’ve decide to go ahead and form a partnership, there are a few steps that must be followed.
Step 1: Select a business name
Pick a business name that not only you like, but that also appeals to the kind of customers you want. Business names must include the choice of entity in them (LP, LLP, etc.).
Step 2: File trademark on business name (optional)
Look through the Michigan’s Business Database once you’ve come up with a name you like, just to make sure it hasn’t already been taken. Then, secure the name by with the Michigan state government.
Step 3: Complete required paperwork
In Michigan, most partnerships are required register with the state, pay a filing fee, and file the required paperwork. The details for each type of partnership are listed below.
General Partnerships (GP) – GPs can either file an assumed business name with the county they’re operating in or file a certificate of co-partnership with the state. Always get partnership agreements in writing to avoid misunderstandings and potential legal complications.
Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership to operate in Michigan.
Limited Liability Partnerships (LLP) – Michigan 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
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.