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 Rhode Island 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 Rhode Island partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
While partnership taxes are typically paid on the partners’ tax returns, Rhode Island does require a yearly informational return from each partnership. This return can be done online at the Rhode Island Department of Revenue’s website. More details on how Rhode Island partnership taxes are measured can be found at this link. The IRS has instructions on 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 Rhode Island are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
General partnerships allow the sharing of revenue and authority, but offer no liability protection to partners. This results in partners being completely liable for the partnership’s debts. GPs are pass-through entities, the partners simply account for the profits and losses of the GP on their own personal taxes.
Limited partnership (LP)
Limited partnerships introduce a second class of partners, limited partners. Limited partners aren’t liable for the LP’s liabilities beyond their monetary investment in the business. General partners are still fully liable for the partnership’s debts. Just like with GPs, all the partners in LPs pay taxes on income derived from the partnership, based on their share of ownership, on their personal tax returns.
Limited liability partnership (LLP)
Limited liability partnerships allow their partners to operate with greater protection from the partnership’s liabilities. The partners are only liable for LLP debts they had a function in creating. The tax structure of LLPs remains the same as that of LPs and GPs.
How to form a partnership in Rhode Island
Once all the parties involved have agreed to start a partnership in Rhode Island, it’s time to start the process of creating your business.
Step 1: Select a business name
Picking a name for your business is a serious matter, but it can be fun as well. Choose a name that appeals to the type of people you want to attract to your business. Bear in mind that you have to include the entity type in your business name (“YZA Widgets, LLP” for example.).
Step 2: Register the business name
Owners of partnerships and other businesses should also verify the name is not already registered by researching the Secretary of State’s Business Database. It’s then quite important to shield your business name by filing it with the Rhode Island Secretary of State.
Step 3: Complete required paperwork
Partnerships must pay the current filing fee along with filing the appropriate paperwork through the Secretary of State.
General partnerships (GP): GPs must file a Certificate of Assumed Name with the Business Section of the Corporations Division of the Secretary of State.
Limited partnerships (LP): LPs must file a Certificate of Domestic Limited Partnership with the RI Secretary of State.
Limited liability partnerships (LLP): LLPs must file an Application for Registration of an LLP with the Rhode Island Secretary 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, check with the Secretary 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 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.
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.