Partnerships can be formed formally or informally when two or more people come together to do business. They are a very common business structure because they allow managerial flexibility and structured revenue sharing. There are different types of partnerships available in New York, each with different advantages. This article explains the differences between them so you can choose the one that may be the best fit for your needs.
Types of Partnerships: Liability & Tax Considerations
Two important topics to consider when you are forming a business are taxation and personal liability. In New York there are more options for how a partnership can be taxed than in many other states. Any partnership that’s required to file a federal partnership income return may also be required to file a New York partnership income tax return if any of the partnership income comes from New York. This can be done online at the New York Department of Revenue’s website. The IRS has useful tips on some of the federal requirements for partnerships.
Personal liability is the other important topic to consider when forming a business. Liability refers to how personally responsible you are for your business’ debts and obligations. If you are fully liable for your business’s debts then your personal assets such as property or savings, can be used to settle outstanding business debts. Some partnerships offer limited liability, protecting your assets from some types of debts.
The types of partnerships offered in New York are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
General partnerships are the most basic type of partnership. Two or more people come together to do business while sharing full liability for all the businesses liabilities. GP partners, called general partners, are responsible for accounting for the profits and losses from the partnership on their personal income tax returns.
Limited Partnership (LP)
Limited partners allow two types of partners, general and limited partners. Limited partners are only liable for the amount of money they’ve invested into the company, while general partners are fully liable for the partnership’s debts. Typically, limited partners are not deeply involved in managing the company and act as silent investors.
LPs are taxed in much the same way as GPs. The general and limited partners account for the partnership’s profits and losses on their individual income taxes, based on their share of the partnership.
Limited Liability Partnership (LLP)
Limited liability partnerships are more rigorously regulated general partnerships that offer liability protection to partners from the debts created by any members of the business other than themselves. These partnerships are very popular with those who work in high-liability professions such as law or medicine.
In the state of New York, LLPs can elect to be taxed either as corporations or as partnerships. However the business elects to be taxed federally, is how it will be taxed by New York.
How to Form a Partnership in New York
If you decide to form a partnership in New York, there are a few mandatory steps you must go through in order to properly create the partnership. In addition to the requirements below, some businesses are required to have additional licenses.
Step 1: Select a business name
Business names are one of the more enjoyable parts of starting your own business. They allow the founders of businesses to think not only about what name best represents their idea of what their business should be, but also what name best appeals to the kind of clients they want their business to attract.
All business names must contain the entity type in their name. For example, the full name of an LLP named “ZAB Widget & Gadget Production” would be “ZAB Widget & Gadget Production, LLP.” Additionally, New York has a list of restricted words you can’t include in your business name.
Step 2: Register the business name
In New York, you can shield your business name from copyright or trademark infringement by filing it with the Department of State. Prior to filing, business owners must check to make sure the name is available in the Department of State’s Business Database.
Step 3: Complete required paperwork
In New York, all partnerships except for GPs require the appropriate paperwork be filed along with the current filing fee.
General Partnerships (GP) – In New York, GPs must file a Certificate of Assumed Name.
Limited Partnerships (LP) – In New York, LPs must have a partnership agreement and must file a Certificate of Limited Partnership with the Department of State in order to be properly formed.
Limited Liability Partnerships (LLP) – New York law requires partners to file a Certificate of Registration with the Department of State in addition to having a partnership agreement.
Step 4: Publish The Partnership’s Existence (LPs & LLPs only)
New York requires that LP and LLPs publish notice of their formation to the public. After publishing business owners must file an Affidavit of Publication along with a Certificate of Publication in addition to a filing fee with the New York Department of State.
Step 5: Get an Employer Identification Number (EIN)
In order to do business in New York you must have an EIN. The application can be found at this link.
Step 6: Apply for a Sales Tax Number
A Sales Tax Number is mandated for all businesses making almost any types of sales in New York. This can be acquired by filling out a Certificate of Authority.
Step 7: Get your day to day business affairs in order
After all your paperwork is approved by the Department of State, you can start doing business in New York.
- 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.
Ready to start your 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.