There are different legal structures your business can take, each offering specific advantages. Some structures work better for certain types of businesses, while others do not. Arizona partnerships are a popular structure for businesses with more than one owner. There are four different types of partnerships offered in Arizona.
Types of Partnerships: Liability & Tax Considerations
The business structure you choose will have an important effect on how your business is taxed. In Arizona, partnerships are considered pass-through entities for tax purposes. This means that if you form a partnership, your share of the partnership’s income is reported on your personal state and federal tax returns. The partnership itself doesn’t pay any taxes on this money, it is considered your personal income. The IRS has information explaining how partnerships deal with federal taxes.
Personal liability is the other important topic to consider when forming a business. Liability refers to how many of your personal assets are able to be seized when the business has to settle a debt. The reverse is true as well, meaning your business assets may be used to settle your personal debts.
The types of partnerships offered in Arizona are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
Liability of partners: Partners in a general partnership are jointly and severally liable for any and all debts incurred by the business. In other words, there is no liability protection in a general partnership. The business partners’ personal and business assets are not separated by law and either can be claimed by creditors to settle a debt.
Tax overview: In Arizona, GPs are considered pass-through business entities. So, you and your partners must report the profits (or losses) on your individual tax returns.
Limited Partnership (LP)
Liability of partners: There are two types of partners in an LP: limited partners and general partners. A limited partnership protects the limited partners from personal liability for the debts incurred by the business in proportion to their original investment in the company. However, the general partner(s) can be held personally liable for the business’ debts and obligations.
For example, if a limited partner invested $50,000 into a business, then they would only ever be responsible for the $50,000 they have invested. General partners, however, are fully liable for the entire debts of the business.
Tax overview: For tax purposes, LPs are pass-through entities, any income or losses must be reported on the individual income tax returns for both general and limited partners.
Limited Liability Partnership (LLP)
Liability of partners: A limited liability partnership provides the business owners with personal liability protection for the debts of the business and the errors of the other partners. This means the partners’ personal assets can’t be easily seized to settle a business debt. It also means the partners’ personal finances may not as easily affect their business.
Tax overview: In Arizona, LLPs must file an annual report with the Arizona Corporate Commission. There is an additional fee if the report is filed late. Beyond this reporting duty and associated fees, LLPs are considered a pass-through entity in Arizona, like a general partnership.
Limited Liability Limited Partnership (LLLP)
Liability of partners: A limited liability limited partnership is very similar to a limited liability partnership, but in an LLLP all partners are protected by liability protection, not just the limited partners. By forming an LLLP a business can also limit the activities of the partners based on their designation as either a general partner or a limited partner.
Tax overview: LLLPs in Arizona are required to submit an annual report and pay filing fees. There is no additional tax on LLLPs imposed at the state level in Arizona.
Limited Liability Company
If you need additional taxation choices or greater protection from personal liability you may want to consider forming a limited liability company (LLC). The LLC business structure combines many of the advantages of partnerships while offering greater flexibility in tax structures. On the downside, they often require more effort to maintain than a partnership but even then, they are known for their simplicity.
How to Form a Partnership in Arizona
Once you’ve decided on the type of partnership you’d like, you need to comply with a few legal steps to get the business going.
Step 1: Select a business name
If you are forming anything other than a general partnership, you must include the business structure’s designation within the business name in order to receive the protections from personal liability that go along with that partnership form. A general partnership doesn’t require this addition to its name since it offers no personal liability protection. The reason for this requirement is to ensure that the public knows they are dealing with a separate business entity, and not a general partnership.
For example, if you open a restaurant called 123 Chicken Wings and are forming a limited partnership (LP), the legal business name would be “123 Chicken Wings LP.”
Step 2: Register the business name
In Arizona you are not legally required to register your business name, but many businesses wish to protect their business name to ensure that they are the only business using that particular name. If you’d like to check to see if someone else is already using your business name, you can search the Secretary of State’s database. If the name you want is available, you can register your business’ name with the state of Arizona.
Step 3: Complete required paperwork
General Partnerships: In Arizona, if you want to form a general partnership, there are no formal documentation requirements. You may simply agree to work with your partner(s) and then start working. You’ll have to report the business income on your personal taxes, but that’s it—for many this is the easiest way to start doing business.
Limited Partnerships: In Arizona, in order to form an LP you must file a Certificate of Limited Partnership with the Secretary of State. Specific instructions for completing the form can be found on the Secretary of State website. Many partnerships create a partnership agreement that acts as a rulebook for how the business operates. You may file your partnership agreement with the state but you are not required to do so.
Limited Liability Partnerships: LLPs are relatively new business structures in Arizona. As a result, new businesses that want to form an LLP must file a Combined Certificate of Limited Partnership & Statement of Qualification to be a Limited Liability Partnership with the Secretary of State.
If you already have an LP and would like to convert it into an LLP you can file a Statement of Qualification to be a Limited Liability Partnership.
Limited Liability Limited Partnerships: To form an LLLP, the business must file these forms with the Secretary of State: Conversion of a Partnership to Limited Partnership and a Statement of Qualification to be a Limited Liability Limited Partnership.
Fees can change at any time, so check with the government offices listed above for the most recent filing fees.
Step 4: Determine if you need an EIN, additional licenses or tax IDs
Partnerships with employees should obtain an Employer Identification Number (EIN) from the IRS. Even if your business will not have employees, an EIN is often required to open a business bank account. Additionally, some businesses require additional licenses from the state in order to operate, such as a license to sell alcoholic drinks. Further taxes or fees may be required as well, depending on your business.
Step 5: Get your day to day business affairs in order
After filing the appropriate forms with the Secretary of State, you are free to do business in Arizona. You may want to consider setting up the following to get your business up and running:
- Business website
- Social media accounts
- Business address
- Trademarked logo, slogan, or design for your partnership
- Business bank and credit card accounts
Ready to start a partnership? LegalZoom will help you choose the type of business partnership that might 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.