When you form a new business you can choose from several different legal structures for your company. The structure you pick will impact how the business is taxed and how liable the owners are for the company’s debts and legal obligations. If there are multiple owners, a partnership is a popular option. Idaho offers three different partnership types for business owners to consider.
Types of Partnerships: Liability & Tax Considerations
The type of partnership you choose will affect how the business is taxed. Typically, a partnership is taxed as a pass-through entity, meaning the profits and losses from the business pass through to the owners’ personal income. The partnership doesn’t file a corporate tax return, rather that is handled on the owner’s personal returns. Regardless of the type of partnership you pick, the IRS will require the business to file an annual report detailing the income generated by the company.
Personal liability is the other important topic to consider when forming a business. Personal liability is a legal term that explains how closely your personal debts and assets are tied up with your business. If you have no personal liability, then none of your business’s debts are counted against your personal assets, in effect the business is totally separate from you. This means if the business takes on a debt, such as a loan or lawsuit, then those creditors can’t seize your home, cash, or other personal assets to settle the debt. While no legal structure gives you complete liability protection, some grant more options than others.
The types of partnerships offered in Idaho are compared below, with information highlighting the differences in liability and tax considerations.
General Partnership (GP)
The simplest form of a partnership, the general partnership offers no liability protection but also isn’t hindered by very many laws, offering maximum freedom to do business as you wish.
- No liability protection, each partner is personally liable for all of the company’s debts
- Your personal assets, such as your home or cash, can be seized to settle business debts
- Income from the business passes through to your personal income, where it is taxed as income
- Exempt from a lot of rules regarding how the business should be named, ran, and maintained—no need for lots of complicated paperwork
Limited Partnership (LP)
Limited partnerships are similar to general partnerships, but offer two levels of partners: limited and general partners.
- Limited partners are not allowed to manage the day to day operations of the business, but enjoy personal liability protection
- Limited partners are only liable for the money they’ve invested into the company
- General partners are fully liable for the business debts, but they control the day to day operations
- Taxed as a pass-through entity, like a general partnership
- Very popular with partnerships that want to attract outside investors that typically act as limited partners, protecting them from the company’s debts and obligations
Limited Liability Partnership (LLP)
In a limited liability partnership partners can’t be held liable for other partners’ mistakes, errors, or outright fraud. These types of partnerships are very popular with professionals that expect to take on a lot of liability risk (typically as the result of lawsuits), such as doctors and lawyers. For example, if three doctors start an LLP and one of them is sued for malpractice and loses a costly lawsuit, the other doctors won’t be personally liable to pay off that debt.
- Similar to a general partnership, but each partner is only liable for their investments like a limited partner in an LP
- Each partner is protected from the other partner’s debts and obligations
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 Idaho
Once you’ve decided on the proper partnership type for your Idaho business, you will need to formalize that decision by taking a couple of steps to get the business up and running.
Step 1: Select a business name
The first step to getting your business off the ground is picking a name for your new business. You will want to pick something that is unique and allows your clients to easily identify your business. You can’t use a name that is already registered with the Idaho Secretary of State, however.
You can check the availability of a business name by checking with the Secretary of State. It is important to remember that you are required by law to include either the abbreviation (LP or LLP) or full partnership type in your business name when conducting your search.
Step 2: Register your business name
In Idaho you must register a business name for any partnership you form in the state. This can be done by paying a $25 filing fee and filing a Certificate of Assumed Business Name.
Step 3: Complete required paperwork:
General Partnerships (GP) – In Idaho, general partnerships are not required to register with the state but may do so by filing a Statement of Partnership with the Secretary of State.
Limited Partnerships (LP) – In Idaho, you can form a limited partnership by filing a Certificate of Limited Partnership and paying the appropriate filing fee.
Limited Liability Partnerships (LLP) – In Idaho, you can form a Limited Liability Partnership by filing a Statement of Qualification of Limited Liability Partnership with the Secretary of State and paying the appropriate 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. Additionally, some businesses require additional licenses from the state in order to operate. Further taxes may be required as well, depending on your business.
Step 5: Get your day to day business affairs in order
After registering your assumed business name and filing the required paperwork with the Secretary of State you are ready to do business in Idaho. To ensure your business gets off to a smooth start you will also want to get a few of things lined up, including:
- Bank account for your business
- Website that promotes your partnership
- Insurance for your company
LegalZoom will help you choose which partnership 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.