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 South Carolina 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 South Carolina partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
While no separate business income taxes are paid by partnerships in South Carolina, the state does require an informational return from partnerships each year. This can be done online at the South Carolina Department of Revenue’s website. The IRS website has some practical information on some of the federal partnership tax requirements.
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 South Carolina are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
General partnerships allows very simple sharing of revenue and taxes but offers no liability protection to the general partners. This means the partners are fully liable for all the partnerships’ debts.
Because partnerships are pass-through entities, the partners pay taxes on the profits from the partnership on their personal income tax returns, based on their share of business ownership.
Limited Partnership (LP)
A common choice for business owners who want investors, limited partnerships allow limited partners whose liability for the business’s debts will not exceed their capital investment. General partners still assume full liability for partnership debts. Limited partners are commonly silent partners, and not as involved in the day to day operations of the partnership as the general partners.
With exactly the same tax structure as GPs, LPs are only more complicated because limited partners typically have a smaller share of the business and therefore tax liability may not be divided evenly among the owners.
Limited Liability Partnership (LLP)
Almost always a good option for professionals who work in high-liability fields, limited liability partnerships shield the partners from liability that was not of their sole creation. For example, if one partner is sued the other partners will not be personally liable for the debt incurred by the lawsuit - assuming they weren’t involved in the suit.
LLPs pay taxes in exactly the same way as GPs, although sometimes LLPs receive greater scrutiny from the government due to the limitation of partners’ liabilities. LLPs are required renew their registration yearly in South Carolina.
How to Form a Partnership in South Carolina
There are a few important steps to go through once the decision has been made to start a partnership in South Carolina.
Step 1: Select a business name
Business names for partnerships must also indicate the type of partnership, for example a limited partnership would have to be called “ABC Company, LP” or “ABC Company, Limited Partnership”.
Step 2: Register the business name
Check to see if the name you want has already been registered by searching through the Secretary of State’s Business Database. If available, you can protect the name of their partnership by filing it with the South Carolina Secretary of State.
Step 3: Complete required paperwork
In South Carolina, most partnerships are required to file the appropriate paperwork. In addition to filing the right documents the current filing fee must be paid. Different forms & fees may be required for foreign partnerships.
General Partnerships (GP) – GPs should file an Assumed Name Form (also commonly known as a Doing Business As “DBA”) with the Secretary of State. Beyond that, GPs aren’t required to file much paperwork.
Limited Partnerships (LP) – LPs are required to file a Certificate of Limited partnership in order to properly register with the South Carolina Secretary of State.
Limited Liability Partnerships (LLP) – An Application for Registration is required by South Carolina both initially and on a yearly basis in order for LLPs to do business in the 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 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.