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 Utah 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 Utah partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
Utah does require a yearly partnership return from each partnership within the state. This return can be done online at the Utah Department of Revenue’s website. Further details on how Utah partnership taxes are evaluated can be found at this link. The Internal Revenue Service has helpful hints on some of the federal taxation 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 Utah are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
GPs have only general partners, all of whom are jointly and severally liable for every debt incurred by the partnership.
GP partners account for the partnership’s revenue on their individual Utah state income tax returns.
Limited Partnership (LP)
Limited partnerships allow two types of partners, general partners and limited partners. Liability is the same for general partners in LPs as it is in GPs, but the limited partners aren’t liable beyond their monetary investment in the business.
Both types of partner pay taxes on the revenue generated by the partnership on their personal returns. Their share of the tax burden usually aligns with their share in ownership of the business.
Limited Liability Partnership (LLP)
Limited liability partnerships offer liability protection to the general partners. They do this by only making the partners liable for business debts they had a hand in creating. LLPs are taxed the same way as GPs, but may be responsible for additional fees due to their limited liability status.
How to Form a Partnership in Utah
When the partners have come together and decided how they want the business set up, there are a few generic steps to go through to get things up and running.
Step 1: Select a business name
Pick a name your customers will like and that you can take pride in. Bear in mind you’ll need to include the entity choice in the business name (LP, LLP, etc.).
Step 2: Register the business name
Prior to trying to file your business name check the state’s Business Database to make sure your name is unique. After that, protect your unique business name by registering it with the Utah state government.
Step 3: Complete required paperwork
In Utah, all partnerships except GPs are required register with the state and pay a filing fee along with filing any additional paperwork. Out of state businesses have additional requirements.
- General Partnerships (GP) – GPs don’t need to register beyond filing an Assumed Business Name Registration (DBA).
- Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership to operate in Utah.
- Limited Liability Partnerships (LLP) – LLPs must turn in an Application for Registration of an LLP with 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 Utah 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.