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. Montana 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 Montana some partnerships must file an annual report detailing their income, more details on that are listed below. 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 Montana 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 generally 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. LPs must file a yearly informational return with the Montana Department of Revenue.
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. In Montana, LLPs must file informational tax returns with both the IRS and the Montana Department of Revenue.
Limited liability companies
Montana also allows the formation of Limited Liability Companies (LLCs) which are considered by some to be quasi-partnerships, offering the liability protection of a corporation with the ease of use and more simplistic tax structure of a partnership. If you are interested in LLCs click here for more information.
How to form a partnership in Montana
If you decide to form a partnership in Montana, there are a few critical steps to go through in order to properly establish the business.
Step 1: Select a name for your partnership
There is a lot of flexibility offered when choosing a partnership name. One requirement is that the type of entity be included in the name of the business. An example of this would be an limited partnership by the name of ‘Smith Widgets.’ The full name of the business would be ‘Smith Widgets, LP.’
You will need to confirm that your name is available by checking with the Secretary of State’s online Business Entity Search.
Step 2: Register business name
After you have confirmed that the name you would like to use is available, you will need to register that name with Secretary of State by filing an Assumed Business Name Registration. There is a fee to register your name, check the Secretary of State website for the latest fees.
Step 3: File the paperwork
Depending on the type of partnership you form, you will have to file organizational documents with the Montana Secretary of State. These documents will register your partnership with the state government and are required by law.
General partnerships (GP)
There is no formal filing requirement to form a general partnership, but general partners are encouraged to file their business name with the secretary of state.
Limited partnerships (LP)
In Montana limited partnerships must file a Certificate of Domestic/ Foreign Limited Partnership with the Secretary of State. There are different forms for domestic or foreign partnerships in Montana. A ‘foreign partnership’ is a partnership that has been formed in another state but is doing business in Montana in such a way that the partnership must register with the state.
Limited liability partnerships (LLP)
Montana law requires that people file Application for Registration of a Limited Liability Partnership with the Secretary of State in order to officially form an LLP.
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. Partnerships with employees will also need to contact the Secretary of State for details regarding workers’ compensation insurance and a state tax ID (required to file state taxes).
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.
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.
Want to start a partnership? 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.
Find out more about Forming a Partnership