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. Minnesota offers three types of partnerships, detailed below.
Types of Partnerships: Liability & Tax Considerations
Most partnerships are considered pass-through entities. This means the income from the company passes through to the owners’ personal income. In Minnesota there is no separate tax form required for partnerships, but the state does require an annual report or “informational return”to be filed. For information about federal taxes, see the Internal Revenue Service website.
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 Minnesota are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
A general partnership offers no liability protection, meaning partners in GPs are liable for any and all debts incurred by the partnership, regardless of which partner created them. When it comes to taxes, GPs are pass-through entities with all the income tax liability passing through to individual partners to deal with on their personal returns. This means the GP doesn’t have to file any tax returns.
Limited Partnership (LP)
Limited partnerships offer two types of partners: limited and general partners. General partners are fully liable for all business debts while limited partners are typically not liable beyond their monetary investment in the LP. Typically, the limited partners have little say in how the partnership is ran. This partnership structure is great when there are some investors that want to act as silent partners, staying out of business operations while still earning a profit.
Each partner pays income tax on the revenue they derive from the LP on their personal tax returns.
Limited Liability Partnership (LLP)
Limited liability partnerships protect general partners from business liabilities created by other partners and/or employees. Some states limit the amount of protection LLPs offer partners. This means if one partner suddenly incurs a lot of debt, such as through a lawsuit, the other partners will not typically be personally liable for the debt.
GPs and LLPs are taxed in the same way. LLPs may have more fees and/or paperwork each year.
Limited Liability Limited Partnerships (LLLP)
Limited liability limited partnerships combine the liability protection of LLP and LP in to one business entity. This makes them popular, but also makes them the most complicated partnership to form and operate.
Despite their complex structure, LLLPs remain pass-through entities.
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 Minnesota
After the best entity choice has been found, it’s time to move on to the business creation process.
Step 1: Select a business name
Decide on a name that reflects the business values of the owners while at the same time appealing to potential customers. Don’t forget to consider that each business must have its entity designation in its title (LP, LLP, LLLP, etc.).
Step 2: File trademark on business name (optional)
Conduct some research using the Minnesota’s Business Database to make sure the name you want is available. After that’s established, protect the desired name by filing it with the Minnesota state government.
Step 3: Complete required paperwork
In Minnesota, partnerships usually need to register with the state, pay a filing fee, and file the required paperwork. Out of state business may be subject to filing additional forms and fees.
General Partnerships (GP) – GPs may file with the state if doing business under a fictitious name. Be sure to always record partnership agreements to avoid legal complications down the road due to misunderstandings. A partnership agreement is a document that spells out each partner's rights and responsibilities, how the partnership can be changed, and how the day to day operations will work.
Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership with the state in order to operate in Minnesota.
Limited Liability Partnerships (LLP) – LLPs must turn in a Statement of Qualification of an LLP with the state.
Limited Liability Limited Partnerships (LLLP) – LLLPs must file a Certificate of Limited Partnership and elect to assume limited liability status in order to be properly formed in Minnesota.
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.