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 Virginia 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 Virginia, partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
Taxes on partnership income are typically paid on the partners’ personal tax returns. A yearly informational return from each partnership within its borders is required in Virginia. Returns can be completed at the Virginia Department of Taxation’s website. Further details on how Virginia partnership taxes are assessed can be found at this link. The Internal Revenue Service has useful information on a number 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' 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 Virginia are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
General partnerships are great for revenue sharing and for co-management of a business, but offer no protection to partners from debts incurred by the partnerships. General partners pay taxes on the company’s revenue using their personal income tax returns.
Limited partnership (LP)
Limited partnerships have two types of partners: general and limited partners. Limited partners’ liability is capped at their personal investment in the business, whereas general partners remain jointly and severally liable for all business debts. Just like with GPs, LP partners pay taxes on income derived from the partnership, according to their share ownership of the business.
Limited liability partnership (LLP)
Limited liability partnerships are essentially more highly regulated GPs that shield the general partners from partnership debts they didn’t create themselves.
LLPs are taxed in exactly the same manner as GPs, but their liability-limiting structure may subject them to greater yearly fees or increased reporting obligations.
Limited liability limited partnership (LLLP)
Limited liability limited partnerships are LPs that elect to be designated as a limited liability entity. LLLPs offer liability protection to general partners from debts created by other members of the partnership and to limited partners for partnership debts in excess of their personal investment in the business.
LLLPs share the same tax structure as other forms of partnership in Virginia.
How to form a partnership in Virginia
The specific steps for forming your partnership may differ from the list below, but these steps outline the basic requirements for properly forming a partnership in Virginia.
Step 1: Select a business name
The official business name of your partnership must include the entity designation of the business (LLLP, LP, etc.) For example, a limited partnership would have to be called “ABC Plumbing, LP.”
Step 2: Register the business name
The first part of filing your name involves checking the State Corporation Commission’s Business Database to make sure the name you want isn’t already registered. If the name you want is available, you can then file it with the Virginia State Corporation Commission (SCC).
Step 3: Complete required paperwork
In Virginia, all businesses are required to register with the SCC and pay a filing fee along with filing any other required paperwork. The forms and fees required may be different for non-resident businesses.
- General partnerships (GP) GPs register by filing a Statement of Partnership Authority. A Certificate of Assumed name may also be required.
- Limited partnerships (LP): Virginia LPs file a Certificate of Limited Partnership.
- Limited liability partnerships (LLP): LLPs must turn in a Statement of Registration of an LLP with the Virginia Secretary of State.
- Limited liability limited partnerships (LLLP): LLLPs start out as LPs and elect to register for limited liability status in the jurisdiction where they were created. Since this is a more complicated process, it’s advised that you consult with the SCC directly or speak to an attorney.
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.
Further taxes or fees may also be required as well each year, depending on your business.
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 intact (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 run and includes details such as adding new partners, changing the business, shutting the business down, or how to deal with partners that leave.
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.
Find out more about Forming a Partnership