When you start a business you can choose from several types of legal structures. The structure you choose determines how the business will be taxed, if you are personally responsible for the business’ debts and more.
If you are going into business with others, you may consider forming a partnership. Partnerships offer simple tax requirements and, in some cases, liability protection. Indiana offers three types of partnerships, detailed below.
Types of partnerships: Liability & tax considerations
Partnerships in Indiana are considered pass-through entities. This means the partnerships pay no business tax in Indiana, but the income from the partnership is passed on to the owners’ personal income, where it is then taxed as income.
Partnerships in Indiana may have to file biennial reports with the Indiana Secretary of State. The Internal Revenue Service offers information on some of the Federal taxation requirements for partnerships.
Personal liability is the other important topic to consider when forming a business. Personal liability refers to how personally responsible the owners are for the business’ debts and obligations. Some partnership structures offer liability protection for their owners, allowing them to shelter their personal assets from the business. For example, if your partnership loses a lawsuit and has to pay a huge settlement, personal liability will help protect your house, cash, and savings from the settlement.
This protection will not apply in all cases, such as if you owe taxes, commit fraud, or do something that violates the partnership’s liability protection.
The types of partnerships offered in Indiana 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 debtsIncome 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 partners’ 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 Indiana
There are a number of steps to take before a partnership can be legally operated in Indiana:
Step 1: Select a business name
All business names in Indiana must include an indication of the entity type (LP, LLP, etc.). Beyond that, business owners can be very creative in selecting a name that they find appealing and that attracts the kind of customers they want.
Step 2: Register the business name
Search the state’s business database once you’ve come up with a name you like to verify it hasn’t been claimed already. Once that’s done, secure your new business name by filing it with the Indiana state government.
Step 3: Complete required paperwork
In Indiana, most partnerships are required register with the state, pay a filing fee, and file the required paperwork.
General partnerships (GP): General partnerships file a Certificate of Assumed Business Name to establish their legal business name. Although not required, many general partnerships draft a partnership agreement to outline how the business will be managed. This is a document that is kept on hand by the owners and is not filed.
Limited partnerships (LP): LPs need to file a Certificate of Limited Partnership to do business within Indiana. Like a general partnership, they too may create a partnership agreement.
Limited liability partnerships (LLP): LLPs must turn in an Application for Registration of an LLP with the state.
Step 4: Determine if you need an EIN, additional licenses, or tax IDs
Partnerships may need an Employer Identification Number (EIN) from the IRS. This number is used to hire employees, fill out paperwork, and open bank accounts for the business. It is like a social security number for a company.
Also, some businesses need additional licenses from the state. Finally, additional taxes may also need to be paid.
Step 5: Get your day-to-day business affairs in order
Once the partnership has been properly formed, double-check to ensure a proper business foundation has been laid:
- Open a business bank account
- Get insurance for your company
- Create a website for your partnership
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.
