When you start a business you have to choose which type of legal structure you’ll use. If you are going into business with other people, a partnership is a popular choice, but there are different types of partnerships to choose from. New Mexico offers four types of partnerships, each with different legal advantages. This article compares each type of partnership and helps you get started with forming the partnership.
Types of Partnerships: Liability & Tax Considerations
When it comes to taxes, New Mexico deals with partnerships as pass-through entities. This means the partners are individually responsible for accounting for the business’s profits and losses on their personal tax returns Information. Additionally, two forms are required each year; RPD-41367 and PTE New Mexico Information Return. Both are available on the New Mexico Tax & Revenue Department’s site at this link.
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 Mexico are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
General partnerships are what often come to mind when people think of partnerships. They offer partners the opportunity to share revenue and control and require very little legal paperwork compared to other types of partnerships, but at the same time make the partners fully liable for debts incurred by the GP.
New Mexico recognizes GPs as pass-through entities and mandates that the general partners account for the profits, losses, and miscellaneous expenses of the GP on their individual income tax returns.
Limited Partnership (LP)
Limited partnerships are like general partnerships except there are two types of partners in a LP. General partners, which commonly control the day to day operations of the partnerships, and limited partners that generally act as silent partners.
General partners in LPs have the same liability as GP general partners but limited partners in LPs are only liable for the partnership’s debts up to their investment in the business. This is to make investing in the partnership more appealing to limited partners.
Limited partnerships have the same tax structure as GPs. As pass-through entities, the partners account for the taxes on their own tax returns.
Limited Liability Partnership (LLP)
Limited liability partnerships are like limited partnerships, but offers general partners protection from liability they didn’t cause. For example, if one general partner is involved in a costly lawsuit that doesn’t involve the other partners, the other general partners are going to be personally liable for any debts resulting from that lawsuit.
While one of the more complicated types of partnerships, LLPs remain pass-through entities whose partners are responsible for the profits and losses on their own taxes. These partnerships are popular with professionals who expect to take on a high risk of liability such as doctors and lawyers.
New Mexico LLPs must file a yearly report.
Limited Liability Limited Partnership (LLLP)
Limited liability limited partnerships are more highly regulated but offer the benefits of both a LLP and an LP. This means general partners’ liability is limited while limited partners’ liability is also capped by the extent of their investment in the partnership. All of the partners are also protected from the other partners’ individual debts, like in an LLP.
A relative newcomer to New Mexico, LLLPs are quickly gaining in popularity because of their liability benefits. They are taxed in much the same way as all other partnerships.
New Mexico LLLPs must also file a yearly report.
Limited Liability Companies
If you want greater liability protection or more flexibility for how the business is taxed, a limited liability company (LLC) may be an option to consider. LLCs can be thought of as quasi-corporations, but offer many of the benefits that partnerships offer.
How to Form a Partnership in New Mexico
If you want to start a partnership in New Mexico there are a few different steps to go through to make things official. Further information is available at the New Mexico Secretary of State website.
Step 1: Select a business name
Pick a unique name that you like, but bear in mind it should appeal to your potential clients as well. Business names can set the tone for all future business endeavors. Additionally, be aware that you must include your choice of entity in the business’s name. This means that “PQD Tile Repair” would be called “PQD Tile Repair, LP” if it’s a limited partnership.
Step 2: Register your business name and get your CRS tax number
Register your business name with the New Mexico Secretary of State. To obtain your CRS number you must visit the New Mexico Tax & Revenue site. This number is used to report your business earnings, but it is not the same filing a tax return.
Step 3: Complete required paperwork
All domestic New Mexico partnerships except for general partnerships require the appropriate paperwork be filed along with any filing fees. There is additional paperwork for foreign partnerships.
General Partnerships – General partnerships can register their paperwork with the New Mexico Secretary of State by filing a Statement of Partnership Authority.
Limited Partnerships – Limited partnerships are created in New Mexico by filing an Application for Certificate of Limited Partnership.
Limited Liability Partnerships (LLP)– Limited liability partnerships are also responsible for filing a Certificate of Limited Partnership with additional information included to put the business in LLP status.
Limited Liability Limited Partnerships (LLLP) – Limited liability limited partnerships are created by filing a Certificate of Limited Partnership with additional information required to gain LLLP status.
Businesses that have employees are required to complete some additional steps to comply with the law. Some businesses are required to obtain additional business licenses and/or permits, depending on the type of business they conduct. The New Mexico Small Business Development Center offers a very useful guide at this link.
Step 4: Determine if you need an EIN
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.
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.
- Consider filing for a trademark to protect your business name and logo. This is different than registering the name with the state and offers more legal protections for your intellectual property.
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.