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. North Dakota offers five types of partnerships, detailed below.
Types of partnerships: Liability & tax considerations
When choosing a partnership tax considerations and personal liability protection are the two topics that are very important, and the areas where business structures can differ the most.
In North Dakota, partnerships are treated as pass-through entities. This means that the company’s profits and losses pass through to the partners’ personal income. This money isn’t taxed at the company level, but as personal income.
Any partnership that gets any income from or does business within the state is required to file an informational North Dakota Partnership Return. This can be done online via the North Dakota Department of Revenue’s website. The IRS website has some facts on 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 can 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 personal debts.
The types of partnerships offered in North Dakota are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
When most people think of partnerships, they immediately think of general partnerships. GPs allow partners complete control over the everyday affairs of the business in addition to easy revenue distribution, but offer partners little to no protection from liability for business debts.
Partners who own GPs account for the profits and losses of the partnership on their yearly individual income tax returns, according to their ownership share of the business.
Limited partnership (LP)
Limited partnerships are a more investor-friendly partnership. They allow limited investors protection from liability beyond their monetary investment in the partnership by offering different classes of partners: general and limited partners.
General partners generally retain full control over the partnership’s operations but are fully liable for the company’s debts. Limited partners, however, are commonly uninvolved in the partnership’s operations but are only liable for their investment into the company.
Both the limited and the general partners account for the LPs revenue and expenses on their personal tax returns, calculated based on how much of the LP they own.
Limited liability partnership (LLP)
Limited liability partnerships are a variant of GPs that afford individual general partners protection from partnership liabilities they aren’t responsible for creating themselves. For example, if one partner is involved in a business-related lawsuit that is entirely his fault, the other partners will not be personally liable for his debts results from the suit. These partnerships are popular with professionals who expect a high amount of liability risk, such as doctors and attorneys.
LLPs are taxed in the same manner as general partnerships.
Limited liability limited partnership (LLLP)
Limited liability limited partnerships are a combination of LLPs and LPs. They allow for limited partners whose liability for the partnership's debts are limited to the amount of their investment in the business. Every partner is protected from each other’s debts as in an LLP.
LLLPs are exactly like LLPs for tax purposes.
Professional limited liability partnership (PLLP)
Professional limited liability limited partnerships are LLPs comprised solely of licensed professionals who provide a legally authorized professional service. Examples would be lawyers, accountants, and doctors.
PLLPs have the same tax structure as LLPs.
How to form a partnership in North Dakota
Once the decision to start a North Dakota partnership has been made, there are a number of steps to go through before the partnership can start doing business within the state.
Step 1: Select a business name
Choose a name that appeals to your audience and defines your business. Partnerships must include the entity choice in its title, for example, a limited partnership named “Fast Bakery” would have to be called “Fast Bakery, L.P.”
Step 2: Register the business name
Check to make sure the name you want is not already registered by checking the Secretary of State’s Business Database. If it is available, you can secure your business name by putting it on file with the Secretary of State.
Step 3: Complete required paperwork
In North Dakota, all partnerships are required to obtain the appropriate paperwork and are required to pay the current filing fee for their type of entity.
General partnerships (GP): GPs must file a Consent to Use Business Name form along with a Partnership Fictitious Name Certificate.
Limited partnerships (LP): A list of the required forms can be found here. Insurers and Bankers may not take the LP entity form in North Dakota.
Limited liability partnerships (LLP): A list of the required forms can be found here along with instructions on filing with the North Dakota Secretary of State.
Limited liability limited partnerships (LLLP): North Dakota treats LLLPs as an LP that has chosen to form itself into an LLLP. The additional filing requirements can be found at this link.
Professional limited liability partnership (PLLP): A PLLP is somewhat unique to North Dakota. PLLPs start out as LLPs and then elect to be converted to a PLLP. Additional certifications are required, based on the professional field in which the PLLP participates.
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. Check with the North Dakota Secretary of State for more information.
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.
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.
