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 Tennessee 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 Tennessee partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
While not required to pay a separate business income tax, some partnerships are required to file yearly informational returns in Tennessee. Fortunately, Tennessee only requires its residents to pay income tax on dividend and interest income. Partnership informational returns can be done online at the Tennessee Department of Revenue’s website. The IRS has good information on many of the federal tax 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 Tennessee are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
General partnerships let the partners share the revenue and management of the business but expose all partners to liability for all the partnership’s debts. General partners in GPs report the partnership’s profits and losses on an individual basis, according to their share ownership of the business. GPs are not subject to franchise and excise tax.
Limited Partnership (LP)
Limited partnerships allow limited partners in addition to general partners. Limited partners are only liable for the LP’s debts up to the amount of their investment in the business. General partners retain full liability for business debts. Limited partners are often silent partners, or investors, that invest in the company but don’t become involved in the company’s day to day operations.
Both classes of partners report the partnership’s profits and losses in the same way they would other personal income and loss. LPs are subject to franchise & excise taxes.
Limited Liability Partnership (LLP)
Limited liability partnerships protect the general partners from business liabilities they aren’t personally responsible for creating. This is a helpful liability shield for professionals working in high liability fields such as law and medicine. LLPs are typically taxed in the same way as other partnership entities in Tennessee.
LLPs are subject to franchise and excise taxes and must also file an annual report.
How to Form a Partnership in Tennessee
Once all the relevant parties have agreed to move forward with the partnership creation, there are a few important steps to take before the business can get up and running.
Step 1: Select a business name
Pick a name that is appealing to customers and that you are proud to be associated with. Most business entities must put their entity designation in their business name (LP, LLP, etc.).
Step 2: Register the business name
Business owners should also ensure the name is available in the Secretary of State’s Business Database. In Tennessee, you can protect your business name by recording it with the Secretary of State.
Step 3: Complete required paperwork
In Tennessee, all partnerships except for GPs require the appropriate paperwork be filed along with the current filing fee. Forms are different for foreign (out of state) partnerships.
- General Partnerships (GP) – GPs may register with the state through this link. The document filed with the state is called a Statement of Partnership Authority.
- Limited Partnerships (LP) – In Tennessee, a LP must file a Certificate of Limited Partnership with the Secretary of State.
- Limited Liability Partnerships (LLP) – A Registration Statement with the Secretary of State is required in order to form an LLP in Tennessee.
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.