When you start a business, you can choose from several types of legal 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 requirements and, in some cases, liability protection. New Jersey 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. New Jersey doesn’t explicitly conform to the federal tax rules for partnerships. Instead, all items of income and other expenses or profits must be included on the yearly New Jersey informational return. The forms are available online at the New Jersey Department of Revenue’s website. Further information is available on New Jersey’s partnership revenue policies here.
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 New Jersey 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 isn’t hindered by very many laws, offering maximum freedom to do business as you wish. Some aspects to be aware of:
- 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 income
- Exempt from a lot of rules regarding how the business should be named, run, and maintained—no need for lots of complicated paperwork
Limited partnership (LP)
Limited partnerships are similar to general partnerships, but offer two levels 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
- There is also a $150 fee per partner each year for LPs (not to exceed $250,000)
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 who 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
- LLPs are also responsible for a $150 yearly fee per partner (not to exceed $250,000)
Limited liability companies
If the idea of a partnership doesn’t appeal to you, consider starting a limited liability company (LLCs). Although slightly more complex to start than a partnership, and with more government oversight, the LLC is a business structure that offers the ease of a partnership with excellent personal liability protection.
How to form a partnership in New Jersey
If you decide to form a partnership in New Jersey, there are a few mandatory steps to through in order to properly create the partnership.
Step 1: Select a business name
Choose a business name that your potential clients will like, and that reflects your own perception of what you would like your business to represent. Choose a unique name that hasn’t already been taken, and bear in mind that the entity type has to be included in the name. Thus, “Johnson Tire Jumpers” would be “Johnson Tire Jumpers, LLP” if it were a limited liability partnership.
Step 2: Register the business name
The Client Registration Branch of the New Jersey Department of Revenue is where new business owners go to file their business paperwork and get things started. By properly registering your business, you help protect it from future trademark and/or copyright infringement.
Step 3: Complete the required paperwork:
In New Jersey, all partnerships, except for GPs, require formal partnership filings along with the current filing fee.
- General partnerships (GP): GPs don’t need to file official paperwork with the state, but may do so if they wish to record partners’ interests in the spirit of avoiding intra-company conflict.
- Limited partnerships (LP): In New Jersey, an LP must file a Certificate of Business Formation with the Division of Revenue.
- Limited liability partnerships (LLP): LLPs are also responsible for filing a Certificate of Business Formation with the New Jersey Department of Treasury – Division of Revenue and Enterprise.
Additional requirements are imposed on partnerships that have employees. A handy checklist for those interested in starting new businesses is available via the New Jersey business portal website.
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 run and includes details such as how to deal with partners that leave, add new partners, change the business, or shut the business down.
When you are ready to form a partnership, LegalZoom can 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