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 West 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 West Virginia partnerships are generally taxed as pass-through entities, meaning the profit and losses from the businesses pass directly into the partners’ personal incomes.
Partnership taxes are typically paid on the partners’ tax returns. However, West Virginia does require a yearly partnership return from each partnership within the state. This return can be done online at the West Virginia Department of Revenue’s website. Further details on how West Virginia 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 West Virginia are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
General partnerships are the most basic form of a partnership. Each partner, called a general partner, is fully liable for the company’s debts. GPs offer minimal government oversight and don’t require complicated paperwork. GP partners pay taxes on the partnership’s profits and losses, based on how much of the partnership they own.
Limited partnership (LP)
Limited partnerships are like GPs but offer a second type of partner, the limited partner. Limited partners typically have less decision-making authority but are only liable for their monetary investment in the LP.
LPs often have a slightly more complicated tax structure than GPs due to the often varying ownership interest created by having two classes of partners. All partners still pay taxes based on how much of the LP they own, however.
Limited liability partnership (LLP)
Limited liability partnerships can be thought of as GPs whose partners decided to have their partnership formed with limited liability status. This increases the paperwork needed to form the LLP, but allows partners to be protected from each other’s sole liabilities. For example, if one partner is involved in a lawsuit that is entirely his fault, the other partners will not be liable for any damages. These partnerships are popular with professionals who expect a high risk of liability such as doctors and attorneys.
LLPs are typically subject to increased oversight, but the tax structure often remains similar, if not identical to GPs. At worst, LLP partners may be asked to file more paperwork with the state and pay a few more fees each year.
How to form a partnership in West Virginia
The steps below outline the major requirements to form a partnership in West Virginia. Your partnership may have specific requirements that differ, talk to the Secretary of State for more details.
Step 1: Select a business name
Business names should reflect the business’s function as well as attracting customers to the business. The best names also reflect an appealing business ideal that represents the partners’ business style. Almost all business entities must have their entity type in their name (LLP, LP, etc.).
Step 2: File trademark on business name
Note: LPs and LLPs complete Step 3 before Step 2.
Search the state’s Business Database to make sure your desired business name is available. Once that’s done, protect the name by registering it with the West Virginia state government.
Step 3: Complete required paperwork
In West Virginia, almost all businesses are required register with the state and pay a filing fee along with filing the required paperwork. Foreign business entities may be subject to additional filing fees or asked to file different forms.
- General partnerships (GP): GPs file an Application for Trade Name. Even if unregistered, it’s strongly advised that GPs have their partnership agreements in writing.
- Limited partnerships (LP): LPs must file a Certificate of Limited Partnership to operate in West Virginia.
- Limited liability partnerships (LLP): LLPs must turn in a Statement of Registration 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 Secretary of State for 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 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 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.
Find out more about Forming a Partnership