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 Washington 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 Washington partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
While Washington doesn’t have a state income tax, it does have a Business & Occupation tax. Additional taxes may apply to your business, information on them can be found at this link. The Internal Revenue Service has information on some of the federal tax mandates that partnerships are subject to.
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 Washington are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
General partnerships only have general partners. General partners are fully liable for the debts of the partnership. GP partners pay their share of the partnership’s taxes based on their business’ gross income.
Limited Partnership (LP)
Limited partnerships have two types of partners: general partners and limited partners. General partners are fully liable for business debts, while limited partners’ liability is capped at the amount of their investment in the partnership. All partners, regardless of type, pay their share of the partnership’s taxes based on its income.
Limited Liability Partnership (LLP)
Limited liability partnerships are general partnerships that elect to take a limited liability form. Typically, partners in LLPs aren’t liable for most of the business’s debts unless they had a direct hand in creating them. The tax structure of LLPs is identical to that of LPs and GPs.
Limited Liability Limited Partnership (LLLP)
Limited liability limited partnerships are limited partnerships that elect to take on limited liability status when they register with the state. LLLPs typically shield general partners from most of the partnership debts and shield limited partners entirely from debts exceeding their personal investment.
Partners in LLLPs also pay their share of the partnership’s taxes based on the business’s revenue.
How to Form a Partnership in Washington
The steps below describe the major requirements for forming partnerships in Washington. Your partnership may have specific requirements not listed here, always check with the Secretary of State for further details.
Step 1: Select a business name
Name choice can be crucial to the success of a business. Typically, good names appeal to the target market of business while also remaining catchy and reflecting the ideals of the owners. Business names in Washington must contain the entity type in their title (LLP, LLLP, et cetera).
Step 2: Register the business name
Before trying to register your business name, check the various relevant databases to make sure your name is viable. After that, protect your business name by registering it with the Washington Secretary of State.
Step 3: Complete required paperwork
In Washington, all partnerships except GPs must register with the state and pay a filing fee along with filing any additionally required paperwork. Out of state businesses have additional requirements.
- General Partnerships (GP) – GPs may need to file Assumed Business Name Registration (DBA).
- Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership to operate in Washington.
- Limited Liability Partnerships (LLP) – LLPs must file an Application for Registration of an LLP with the Washington Secretary of State.
- Limited Liability Limited Partnerships (LLLP) – LLLPs must file a Certificate of Limited Partnership that includes a statement that the partners have elected to form the business as an LLLP.
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.