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 Dakota 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 Dakota partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
South Dakota requires some partnerships to file a yearly information return that summarizes the profits and losses from the business’s in-state activities. This can be done online at the South Dakota Department of Revenue’s website. The IRS website has informative thoughts 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 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 Dakota are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
Most people thinking of general partnerships when they think about partnership. GPs allow profit sharing and division of responsibility, but also expose the personal assets of the partners to liability, based on the partnership’s debts.
GPs are pass-through entities. Any profits and losses from the partnership are taken into account on the individual partners’ income tax returns while the business itself often pays no separate income tax.
Because South Dakota has no individual state income tax, tax liability for partnerships may be delightfully small.
Limited Partnership (LP)
Two type of partners, Limited partners and general partners, are allowed by limited partnerships. Limited partners can be thought of as investors, due to their limited involvement in the daily affairs of the partnership and their limited liability exposure, based on their personal investment in the business. General partners remain completely liable for all partnership debts.
Like GPs, each of the partners is responsible for paying taxes on the partnership’s income, based on how much of the partnership they own.
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 taxed the same as GPs and LPs.
Limited Liability Limited Partnership (LLLP)
Limited liability limited partnerships combine the advantages of LPs and LLPs. They allow limited partners with capped liability in addition to offering general partners protection from partnership debts they aren’t personally responsible for incurring.
While slightly more complicated from an organizational perspective, LLLPs still have the same simple tax structure as the other partnership types.
How to Form a Partnership in South Dakota
Once an entrepreneur decides to start a partnership in South Dakota, there are a number of important steps to take before the partnership can start doing business within the state.
Step 1: Select a business name
Entrepreneurs should focus on picking a name that appeals to their customers and that also gives them pride in their business. The name needs to include their choice of entity such as LP, LLP, or LLLP. For example, a limited partnership may be called, “Car Mechanic LP.”
Step 2: Register the business name
Before getting attached to a particular business name, entrepreneurs should determine its availability by checking the Secretary of State’s Business Database. Once availability has been verified, owners can register it with the South Dakota Secretary of State.
Step 3: Complete required paperwork
South Dakota required business to file the right paperwork in and to pay the current filing fee before they can be properly established within the state. Finally, your business may need a registered agent before it can open its doors.
General Partnerships (GP) – GPs aren’t required to register with the state, but must register any fictitious business names.
Limited Partnerships (LP) – In South Dakota, a LP must turn in a Certificate of Limited Partnership with the Secretary of State.
Limited Liability Partnerships (LLP) – South Dakota statutes require partners to file a Statement of Qualification with the Secretary of State in order to create an LLP.
Limited Liability Limited Partnerships (LLLP) – An LLLP is created by first forming an LP and then electing to convert to an LLLP. Contact the South Dakota Secretary of State for details before moving forward, as the process is more complicated than forming other types of partnerships.
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.