How to Form a North Carolina Partnership
How to Form a North Carolina Partnership
When you start a business one of the first things you have to decide on is which legal structure your business will use. When several people go into business together they can form a partnership, which is one type of business structure. Partnerships offer simple tax management and some types of partnerships protect their owners’ personal assets from the company’s business debts. There are four types of partnerships offered in North Carolina.
Types of Partnerships: Liability & Tax Considerations
When it comes to taxes, partnerships are considered pass-through entities. This means the income and losses from the partnership passes over to the partners’ tax returns as personal income. The profits and losses are taxed that way, and not as corporate income such as would happen with some other business structures such as a corporation. Many people find this simple pass-through tax structure to be easier to deal with than paying separate corporate taxes and is one of the reasons why partnerships are popular.
Although partnerships don’t pay taxes themselves, North Carolina does require a yearly informational return from partnerships operating within the state. This return reports the partnerships income and losses can be completed online at the North Carolina Department of Revenue’s website. Further details on how partnership handle state can be found at this link. 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 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 North Carolina are compared below, with information highlighting the differences in liability and tax considerations.
As the most basic type of partnerships, general partnerships (GP) give the ability to simplify taxes while distributing revenue, but offer no real protection to the partners from the partnership's’ debts and liabilities.
The partners in a GP pay all taxes owed by the partnership on their own personal income tax returns according to how much of the partnership they actually own.
Limited partnerships (LP) are similar to general partnerships but offer the option of including a second type of partner called limited partners. Limited partners are only liable for their investment in the partnership while general partners are fully liable for all of the partnership's debts. Typically, limited partners aren’t involved in the day to day operations of the company and act as silent partners.
The tax structure of LPs is exactly the same as GPs with the partners paying taxes for the LP based on their share of ownership. These types of partnerships are popular with partnerships seeking investment.
Limited Liability Partnership
An attractive option for partners in high liability professions, limited liability partnerships (LLP) offer considerable personal liability protection by shielding each partner individually from debts and liabilities caused solely by other partners. For example if one partner is involved in a costly lawsuit that is entirely his own fault, the other partners will not be personally liable for the debts caused by that lawsuit.
While the liability exposure may be different and there may be slightly more regulation of LLPs, the tax structure remains similar to that of GPs and LPs. These partnerships are popular with professions that expect a high risk of liability, such as doctors and lawyers.
Limited Liability Limited Partnership
Limited liability limited partnerships (LLLP) offer the most liability protection out of all the partnership options. Combining the legal structures of LLPs and LPs, these types of partnerships offer the opportunity to find limited partners to invest in their business while at the same time offering al partners protection from LLLPs debts and liabilities not of their own creation.
LLLPs are exactly like LLPs for tax purposes.
How to Form a Partnership in North Carolina
Deciding to start a partnership in North Carolina is the easy part. Once the decision has been made there are a few mandatory steps to go through before your partnership will be ready to do business in the state.
Step 1: Select a business name
Choosing a name for your business can be fun, but also challenging. The challenge is in coming up with an original name that represents your business while appealing to your clients. Fortunately, there are few restrictions on business names in North Carolina, as long as, you include the entity type in the name of the business (i.e. limited partnerships will have L.P. at the end of their name).
Step 2: Register the business name
Once you’ve chosen a name you need to check to make sure the name is not already registered by another business by using the Secretary of State’s Business Database. If your name is available you should register it with the North Carolina Secretary of State to prevent other businesses from using it in their official paperwork.
Step 3: Complete required paperwork
In North Carolina, all partnerships except GPs are required to pay the current filing fee along with filing the appropriate paperwork.
General partnerships must file a Certificate of Assumed Name with the County Register of Deeds.
Limited partnerships must file a Certificate of Domestic Limited Partnership with the NC Secretary of State.
Limited Liability Partnerships
Limited liability partnerships must file an Application for Registration of an LLP with the North Carolina Secretary of State.
Limited Liability Limited Partnerships
The document of choice for limited liability limited partnerships in North Carolina is the Registration as a Limited Liability Limited Partnership. It must be filed with the state’s Secretary of State.
Step 4: Determine if you need an EIN or other licenses
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.
Check with the Secretary of State to see if your specific partnership needs any other special licenses to operate. For example, plumbers, electricians and contractors may need special permits or certificates to practice in North Carolina.
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.
Want to start a partnership in North Carolina? 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.