In Arkansas, business owners can decide whether to do business under a number of legal structures. If you are creating a business with other people you may consider forming a partnership.
Partnerships can be created informally or formally when two or more people want to come together to run a business. There are both advantages and drawbacks to creating a partnership. In Arkansas, business owners have four different types of partnerships to choose from.
Types of Partnerships: Liability & Tax Considerations
Partnerships are typically considered pass-through entities in Arkansas, meaning the profits and losses from the partnership are reflected in the personal income taxes of the partners. The partnership itself doesn’t file corporate taxes. The IRS has useful information on the federal tax requirements for partnerships.
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 Arkansas are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
Liability of partners: General partnerships offer no liability protection for their owners. This means that the personal assets of the partners can be seized through debt collection or in other civil actions initiated against the partnership itself. Likewise, the partners’ personal debts may affect the partnership’s assets—there is no separation between the partners’ personal assets and the partnership.
Tax overview: GPs in Arkansas are required to file informational returns both with the IRS and the state’s Income Tax Division. The money made or lost by the partnership is shared among the partners on their individual personal tax returns in accordance with their partnership agreement.
Limited Partnership (LP)
Liability of partners: Limited partnerships have two types of participants, general partners and limited partners. General partners in an LP are liable for the debts of the partnership, but the limited partners gain protection from the partnership’s liability. Limited partners are only liable for the amount they invested into the partnership. For their added risk, general partners have control over the day to day operations of the business.
Limited partnerships are usually formed when outsider investors are needed to get the business going. These partners are usually the limited partners, or silent partners, that do not control the business operations but are protected from the business’ liabilities.
Tax overview: LPs are treated the same way as GPs for tax purposes, with individual partners sharing the profits and losses from the partnership on their individual income tax returns, based on the partnership agreement.
LPs must file informational tax returns with both the IRS and the Arkansas Income Tax Division (AITD) in addition to filing a yearly report with the Arkansas Secretary of State.
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 Arkansas, LLPs must file informational tax returns with both the IRS and the AITD. LLPs must also file an annual report with the Secretary of State for Arkansas.
Limited Liability Limited Partnership (LLLP)
Liability of partners: Limited liability limited partnerships limit the liability of the general partners for actions taken by other people within the partnership. These types of partnerships are used in professions where extreme cases of liability are accepted as part of the practice, such as medicine or law.
Tax overview: LLLPs must complete and file an annual report with the Arkansas Secretary of State in addition to a yearly informational return with the IRS and Arkansas Department of Finance & Administration.
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 Arkansas
If you decide to form a partnership in Arkansas, there are a few mandatory steps to go through in order to properly create the partnership.
Step 1: Select a business name
You may name your business almost anything you want, so long as the name has not already been taken by another business.
It’s important to bear in mind that your business name must also contain information on the type of entity it is. An example being a limited liability partnership named “ABC Widget Manufacturing” would be called “ABC Widget Manufacturing, LLP.”
Step 2: Register your business name
You can also search to see if someone is already using the name you want by using the state of Arkansas’ Secretary of State’s Trademark database. If the name you want to use is available, you can file it with the Secretary of State. This prevents other businesses from potentially stealing your name or trying to ride your coattails to success.
Step 3: Complete required paperwork
In Arkansas, all partnerships except for general partnerships require the appropriate paperwork be filed along with the current filing fee.
General Partnerships: There is no formal filing requirement to create a general partnership. The partners simply choose to do business together and that’s it. However, many partnerships create a partnership agreement that outlines the roles and responsibilities of the partners. This helps resolve disputes that may arise later.
Limited Partnerships: In Arkansas, a limited partnership must file a Certificate of Limited Partnership with the Secretary of State.
Limited Liability Partnerships: Arkansas law requires that people file a Qualification of Limited Liability Partnership form with the Secretary of State in order to form an LLP.
Limited Liability Limited Partnerships: To form an LLLP in Arkansas, business owners must file a Certificate of Limited Liability Limited Partnership with the Secretary of State.
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 partnership isn’t hiring employees, an EIN is often required to open bank accounts.
Some businesses require additional licenses from the state in order to operate, such as a license to sell alcoholic beverages. Further taxes may be required as well, depending on your business.
Step 5: Get your day to day business affairs in order
Once you have your appropriate certificate back from the Secretary of State, you can start doing business in Arkansas. Every new business should consider:
- Opening a bank account for the business
- Setting up a permanent address for the business
- Creating a website for the business
With the right type of partnership structure, the sky's the limit as to how far you and your partners can take the business.
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.