There are different business structures offered for entrepreneurs who want to go into business with partners. A popular type of business structure for multiple partners is a partnership. In Ohio there are different types of partnerships that offer unique advantages. This article will help you understand the differences between these types of partnerships so you can choose the one that works best for you.
Tax Considerations and Personal Liability
The two areas where business structures differ the most is in taxation and personal liability. When it comes to taxes, partnerships in Ohio are treated like pass-through entities. This means the income the partnership earns passes through to the owners’ personal income, and is taxed that way.
In Ohio, some partnerships are required to file biennial reports. These and other important forms can be found online at the Ohio Secretary of State’s website. The IRS has useful tips on some of the federal tax policies regarding partnerships.
Personal liability is the other important topic to consider when forming a business. Liability refers to your personal responsibility to the business as a partner. If you are fully liable for the partnership’s debts and obligations, then there is no difference between your personal assets and the business assets of the partnership. Either can be used to settle the other’s debt, meaning your home or personal savings could be seized to pay a business debt.
The types of partnerships offered in Ohio are compared below, with information highlighting the differences in liability and tax considerations.
Types of Partnerships: Liability & Tax Considerations
General Partnership (GP)
A general partnership is subject to the least government oversight and is the simplest form of partnership. It allows revenue and control sharing but exposes partners to joint and several liability for all the partnership’s debts. GP partners must pay their individual income taxes based on the revenue derived from their share of the partnership.
Limited Partnership (LP)
Limited partnerships add a second class of partner, limited partners, whose liability for the partnerships debt will not exceed their monetary investment in the business. Typically, limited partners act as silent partners and don’t have much say in the day to day operations of the company. General partners typically run the company’s day to day operations and are fully liable for the company debts.
Like GP partners, all LP partners account for the partnership’s profits and losses on their individual income tax returns, dictated by their share of the partnership.
Limited Liability Partnership (LLP)
Limited liability partnerships have only have general partners, but offer general partners protection from the partnership’s liabilities if they aren’t of their own individual creation. For example, if one partner is involved in a lawsuit that is solely his own fault, the other partners will not be personally liable for damages caused by that lawsuit. LLPs are popular with professionals the expect a high risk of liability risk, such as doctors and lawyers.
LLPs are taxed in the same way as other partnerships but have the additional requirement of filing biennial reports with the state.
Limited Liability Limited Partnership (LLLP)
Limited liability limited partnership combine the best of both worlds by allowing limited partners like LPs and offering liability protection to general partners like LLPs.
LLLPs are taxed like other partnerships.
How to Form a Partnership in Ohio
If you decide to start a partnership in Ohio, there are a few crucial steps to go through in order to officially create the partnership.
Step 1: Select a business name
A good business name reflects your business ideals while drawing the type of clients and/or customers you want. It’s a good idea to include the entity type in the business name (i.e. “Wobbly Wrenches, LLP”).
Step 2: Register the business name
You should verify if your business name is available by using the Secretary of State’s Business Database.In Ohio, you should register your business name by filing it with the Secretary of State.
Step 3: Get an EIN, and determine if you need 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.
Partnerships with employees will also create an Unemployment Compensation Tax Account (UCTA) with the Ohio Department of Job & Family Services (ODJFS).
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 Ohio Secretary of State for more details.
Step 4: Establish a business account, then complete required paperwork with the Secretary of State and Department of taxation
After establishing a bank account, all partnerships are required to file the appropriate paperwork along with the current filing fee with the Ohio Secretary of State in addition to designating a statutory agent. Also, all businesses should consult with the Ohio Department of Taxation.
Foreign and/or out-of-state partnerships have to file different variants of many of the required forms.
General Partnerships (GP) – GPs must file a Statement of Partnership Authority.
Limited Partnerships (LP) – In Ohio, an LP must file a Certificate of Limited Partnership with the Secretary of State.
Limited Liability Partnerships (LLP) – Ohio law requires partners to file a Statement of Domestic Qualification with the Secretary of State in order to form an LLP.
Limited Liability Limited Partnerships (LLLP) – To form an LLLP in Ohio, business owners must first form an LLP and then, after a successful application to amend the partnership agreement, convert to an LLLP by filing a statement of qualification with the Ohio Secretary of State.
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.
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.