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 Wisconsin 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 Wisconsin 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, Wisconsin does require a yearly partnership return from each partnership within the state. This return can be done online at the Wisconsin Department of Revenue’s website. Further details on how Wisconsin 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 Wisconsin are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
Partners in general partnerships are fully liable for all of the partnership’s debts. Partners pay tax on income from the partnership on their personal tax returns.
Limited Partnership (LP)
There are two types of partners in a limited partnership: general and limited partners. General partners in LPs are fully liable for all LP debts. Limited partners in LPs are not liable beyond their capital investment in the business.
LP tax structure is usually incrementally more complex than GP tax structure because of the two partner classes. Despite this, all partners pay tax on partnership income, based on their share of ownerships, using their personal tax returns.
Limited Liability Partnership (LLP)
While somewhat more difficult to form and subject to greater government oversight, limited liability partnerships offer liability protection to partners from LLP debts not incurred by them, personally. For example, if one partner is sued for something that is their sole responsibility, the other partners will not be personally liable for damages from that lawsuit.
While LLPs may be subject to greater regulation/fees and are more difficult to form, their tax structure is the same as GPs.
How to Form a Partnership in Wisconsin
There are a number of steps to go through in order to properly establish a Wisconsin partnership.
Step 1: Select a business name
Except for general partnerships, all partnerships must have their entity designation in their title. For example, a limited partnership would be named “ABC Plumbing, LP.”
Step 2: Register the business name
Research Wisconsin’s State Business Database to make sure the business name you want isn’t already registered. Once that’s done, the Wisconsin Department of Financial Institutions is where you will file your new business name in order to protect it.
Step 3: Complete required paperwork
In Wisconsin, all partnerships except GPs are required 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 will probably need to file an Application for Registration of Tradename/Trademark/DBA. Regardless of how GPs decide to file or not file, it’s recommended that all partnership agreements should be in writing.
- Limited Partnerships (LP) – LPs must file a Certificate of Limited Partnership to operate in Wisconsin.
- Limited Liability Partnerships (LLP) – LLPs must submit 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 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.