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. Missouri offers four types of partnerships, detailed below.
Types of partnerships: Liability and tax considerations
Most partnerships are considered pass-through entities. This means the income from the company passes through to the owners’ personal income. In Missouri there is no separate tax form required for partnerships, but the state may require an informational return (also known as an annual report) from some partnerships. 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 Missouri 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)
The best (and worst) of both worlds, limited liability limited partnerships combine limited partner protections with limited liability protections to insulate businesses partners from much of the partnership’s liability.
LLLPs still have a simple tax structure in which the partners pay the business’s income tax on their personal income tax returns.
Limited liability company
Finally, a Limited Liability Company (LLC) is a quasi-corporate business entity that more fully protects its owners from business debts than partnerships, but subjects them to greater government oversight. Additionally, LLCs are more difficult to form and run and typically have a more complex tax structure than partnerships.
How to form a partnership in Missouri
Once you’ve settled on an entity type, it’s time to move forward with the business creation process.
Step 1: Select a business name
Decide on a name you and your partners like that also appeals to your target market. The best business names reflect a company’s ideals while also appealing to the types of customers the business wants to attract. The name of your business will likely have to include the entity choice in it (LP, LLP, LLLP etc.).
Step 2: File trademark on business name (optional)
Look through the Missouri Business Database to make sure the business name you’re after isn’t already claimed. Once that’s done, secure the name by filing it with the Missouri state government.
Step 3: Complete required paperwork
In Missouri, partnerships typically need to be on file with the state, pay a filing fee, and file the required paperwork. Missouri has some additional and/or different paperwork for out of state businesses.
General partnerships (GP): GPs file with the state if doing business under an assumed name. Record partnership agreements to avoid legal issues with other partners due to misunderstandings.
Limited partnerships (LP): LPs must file a Certificate of Limited Partnership with the state in order to operate in Missouri.
Limited liability partnerships (LLP): Missouri LLPs must turn in an Application for Registration 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 Missouri. The Secretary of state should be contacted directly for more information regarding LLLP 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 intact (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.
Ready to start your partnership in Missouri? LegalZoom will help you choose which one 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.