When you start a business one of the first things you’ve got to decide is which business structure your business will take. Each structure offers different combinations of tax advantages, liability protection, and other unique advantages. This article will help you understand how partnerships differ in Pennsylvania so you can choose the one that may be best for you.
Types of Partnerships: Liability & Tax Considerations
Two important topics to consider when you are forming a business are taxation and personal liability. In Pennsylvania partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
Pennsylvania may require an annual registration from some partnerships within its borders. Information on this registration can be found online at the Pennsylvania Department of State’s website. More details on the yearly requirements for partnerships in Pennsylvania can be found on this link. The IRS has details regarding federal taxes and 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 Pennsylvania 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. They offer a simple structure, but no liability protection. This means GP partners are personally liable for the debts of their business - the partners’ personal assets can be seized to settle business debuts.
GP partners account for all the losses, earnings, and other miscellaneous expenses of their business on their personal income tax returns.
Limited Partnership (LP)
Limited partners are great for business owners who want capital without added managerial complications. LPs allow a second class of partner, limited partners, who often have limited managerial authority while at the same time being shielded from the LPs debts beyond their capital investment in the business.
LPs are still pass-through entities. Thus, partners pay taxes derived from the LP on their personal returns just like with GPs.
Limited Liability Partnership (LLP)
LLPs limit general partners’ liability for debts created by their own actions. This means that general partners in LLPs are typically only liable for the debts incurred by the LLP that they had a hand in creating.
LLPs are subject to slightly more regulatory interference from the state, but their tax structure remains the same as GPs and LPs.
Limited Liability Limited Partnership (LLLP)
Business owners who want to raise capital and have direct control over their business, while at the same time limiting their personal liability often choose to create limited liability limited partnership. LLLPs combine the advantages of LPs and LLPs. They offer liability protection to limited partners for any business debts beyond their investment while offering general partners protection from business debts not of their own creation. Taxes for LLLPs are paid in the same way as LLPs.
How to Form a Partnership in Pennsylvania
When entrepreneurs decide to create a partnership in Pennsylvania there are a few steps they must go through before they can start doing business.
Step 1: Select a business name
It’s important for business owners to pick names that appeal not only to them, but also to the kind of clients they want to attract. One other consideration is that the entity choice must be included in the business name. An example of this would be “ABC Doodles, LP” in the case of a limited partnership.
Step 2: Register business name
Check to see if a name you like is already registered by another business by searching the Secretary of State’s Business Database. Once you’ve ensure your name is unique, protect it by filing it with the Pennsylvania Secretary of State.
Step 3: Complete required paperwork
In Pennsylvania, all partnerships except GPs are required to register with the state in addition to paying the current filing fee. Paperwork and/or fees may differ for foreign partnerships.
General Partnerships (GP) – GPs must file a Fictitious Name Registration with the Pennsylvania Department of State if they aren’t operating under the owners’ real names as the business name.
Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership with the Department of State.
Limited Liability Partnerships (LLP) – LLPs must file a Statement of Registration as an LLP with the Pennsylvania Department of State. LLPs are also subject to an annual registration and associated fees.
Limited Liability Limited Partnerships (LLLP) – LLLPs are registered in much the same way as LPs. For details on the process, contact the Pennsylvania Department of State.
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, contact the Department of State for more details.
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.
LegalZoom will help you choose which partnership 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.