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 Vermont 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 Vermont partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
While partnerships aren’t taxed like other types of business, there are still yearly requirements imposed on them by the state. This “informational return” can be done at the Vermont Department of Taxes website. Further details on how Vermont partnership taxes are assessed can be found at this link. The Internal Revenue Service has handy information the federal requirements for partnerships to be tax compliant.
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 Vermont are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
General partnerships allow only general partners. This keeps the management structure simple, but makes each partner fully and personally liable for all the business’s debts. Partners in GPs pay taxes on the revenue generated by the business on their personal income tax returns.
Limited Partnership (LP)
Limited partnerships allow two types of partners, limited and general partners. While general partners remain completely liable for all business debts, limited partners are only liable for their investment in the partnership.
As with GPs, LP partners (whether limited or general) pay taxes on revenue generated by the business on their personal returns, based on their share ownership of the business.
Limited Liability Partnership (LLP)
Limited liability partnerships give their general partners protection from business debts created by other partners and partnership employees. Some states limit the amount of protection given to general partners by LLP status.
LLPs are taxed in exactly the same manner as GPs, but may be subject to additional fees and regulatory hurdles because of their liability limiting nature.
How to Form a Partnership in Vermont
Once you and all your partners have decided to move ahead with a partnership, there are a few steps that are required by the state of Vermont before your partnership can do business within its borders.
Step 1: Select a business name
Partnerships must contain a designator in the business name, so the public knows they are dealing with a partnership. For example, “ABC Plumbing” would be called “ABC Plumbing, LP” if it were a limited partnership.
Step 2: Register business name
Before attempting to register, check the Secretary of State’s Business Database to make sure the name you want isn’t already taken. Secure your business name with the Vermont Secretary of State.
Step 3: Complete required paperwork
In Vermont, all partnerships are required to register with the state and pay a filing fee along with filing any additionally required paperwork. Out of state businesses have additional and/or different requirements.
- General Partnerships (GP) – GPs need to register with the state by filing a Statement of Partnership Authority with the Vermont Secretary of State. Renewal is required every five years. It is strongly encouraged that all partnership agreements be recorded in writing.
- Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership. Oddly, LPs do not need to renew with the state on any specific schedule.
- Limited Liability Partnerships (LLP) – LLPs must turn in a Statement of Qualification of an LLP with the Vermont Secretary of State. Annual renewal is required.
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.
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.