Step by Step Guide: How to Start a Limited Partnership
A Limited Partnership is a legally recognized type of business structure that consists of two kinds of partners. These two types of partners are called general partners and limited partners, and both play different roles within the business. A limited partnership must consist of at least one general partner and at least one limited partner. General partners are involved in the day-to-day operation and management of the business, share in the profits as well as the losses, and can be held personally liable for the partnership's debts. However, general partners can avoid this by operating under an LLC (limited liability company) or Corporation, which both provide limited liability protections.
Limited partners, on the other hand, act as passive investors; they invest financial resources into the company and share in the profits but are not involved in its day-to-day management and operation. Limited partners also hold no personal liabilities for the debts of the partnership. This type of partnership encourages investors to invest without the risk of losing more than they have personally invested. Limited partnerships are also good for individuals who are seeking investors but do not wish to sacrifice the control and autonomy they hold over a business's day-to-day operations and general direction. This article will detail all of the basic and necessary steps that need to be taken in order to start a limited partnership.
Steps to Start a Limited Partnership:
- Choose a State to Register
- Pick a Name for your Limited Partnership
- Write a Partnership Agreement
- Designate InCorp Services as your Registered Agent
- File your Certificate of Limited Partnership
- Obtain an Employer Identification Number (EIN)
- Obtain all Required Business Licenses and Permits
- Open a separate Business Bank Account
- Acquire Business Insurance
1. Choose a State to Register
Some business owners may choose to register their businesses in states where they do not live. Why is this? It is mostly due to the fact that some states have more pliable laws in regards to starting businesses and are deemed more "business-friendly." States such as Nevada and Delaware have a reputation for having very "business-friendly" environments. If this is something you would like to take advantage of, you can compare the laws of the state in which you live regarding forming partnerships with other states. You can look at various tax rates, fees, and the nature of your particular industry in your state and other states.
If this is something you are not interested in and would like to form your limited partnership in the state that you live in, you can skip this step altogether.
2. Pick a Name for your Limited Partnership
Choosing a name for your limited partnership is an important first step. Of course, your name should reflect the nature of your business and be something that you like, but you will also need to ensure that no other business in your state is using the name you would like to use. You can search your state's business database to make sure that your name is indeed available.
3. Write a Partnership Agreement
Some states do not require Limited Partnerships to have a partnership agreement, but it is a good idea either way as it can help prevent disputes between owners. A partnership agreement details the nature of how your business will be operated and the roles that are assigned to various individuals.
The following are some general examples of what could be included in a partnership agreement:
- The name of the limited partnership.
- The specific nature and goals of your busines.
- What partners will be involved and what their rights and roles are.
- What financial investments have been made and by what partner.
- How profits will be distributed amongst owners.
- How losses will be shared.
- The procedure to be followed if someone wants to sell off their stake in the partnership.
- How the management and decision making of the business will be conducted.
- How meetings will be conducted and how often.
4. Designate InCorp Services as your Registered Agent
Limited Partnerships in all 50 states are required by law to have a designated registered agent. A registered agent receives important legal documents from the state and service of process communications (required notice of a lawsuit) on behalf of your business. Having a registered agent ensures that you will receive these vital communications.
The role of a registered agent can be performed by an individual within your company or by an outside registered agent service. Registered agents must be available at all times within regular business hours to receive mail and must have a physical address. You will need to identify your registered agent in your Certificate of Limited Partnership.
5. File your Certificate of Limited Partnership
You will need to obtain, prepare, and file your Certificate of Limited Partnership, and this will officially register your limited partnership with the state. You will need certain basic information such as the name of your limited partnership, your official office address, the name and address of your registered agent, details about each partner's contributions and investments to your limited partnership, and the names and addresses of your limited partnership's general partners, and the general-purpose and function of your limited partnership.
The information required can differ from state to state. However, your Certificate of Limited Partnership will detail a basic outline of your business and business structure, and once completed and approved, this will officially establish your company as a limited partnership.
6. Obtain an Employer Identification Number (EIN)
An employer identification number (EIN) functions as your federal tax ID number with the IRS. Obtaining an employer identification number will allow you to file taxes on behalf of your limited partnership; in essence, it serves as a social security number for your business. Obtaining an EIN will also be needed to open a business bank account, apply for loans, apply for business licenses, and hire employees.
So, this is a necessary step in regards to starting your limited partnership and should be done early on so that you can get access to the appropriate licenses or any business loans outside of your limited partners' investments you may need in order to operate.
7. Obtain all Required Business Licenses and Permits
Check with your state in order to see what business licenses and permits you will need to legally operate your business as a limited partnership. Requirements may vary depending on the state and which general industry your business falls under. Some industries require both federal and state licenses and permits. Also, there may be additional licenses and permits that may be required by your local government, such as your county or your city. It's important to make sure you have obtained all of the necessary licenses and permits to run your business in compliance with the law at all levels of governance.
8. Open a Separate Business Bank Account
You will now need to set up a separate business bank account used exclusively for your limited partnership. Depending on which bank you decide to open your account with, you may need to provide certain documentation and information about your business. Generally speaking, you will need some basic information regarding your company, but additional information or documents may be needed.
The following is a list of things you may need in order to open a business bank account for your limited partnership:
- Name and address of your business.
- Your employer identification number.
- Date that your limited partnership was established.
- Personal information such as social security numbers and birthdates of everyone listed on the bank account application.
- Partnership agreement.
- Certificate of limited partnership.
- Business license.
Once your business account is operational, it is important that you make sure it is used exclusively for business purposes. Mixing your or your partners' outside finances with your business bank account can leave you vulnerable to lawsuits and administrative dissolution, where the state can, in effect, legally close your business.
9. Acquire Business Insurance
If your limited partnership has employees, you will be legally required to carry workers' compensation insurance for them. Depending on your business's industry, you may be able to find specific policies designed to cover your industry's insurance needs. General liability insurance policies can also protect your business in a variety of ways.
Businesses are more likely to recover from unfortunate events and lawsuits if they have the appropriate insurance coverage. In certain circumstances, this can make or break a business and can dictate if it will be able to survive. Therefore it is highly recommended that you have the appropriate coverage for your limited partnership. You can meet with a local business insurance agent to discuss your options to help protect your business.
Conclusion
As soon as you have completed these initial steps, you will have successfully met the basic requirements needed to start a limited partnership. By ensuring that you meet these basic requirements, you will be getting off to a great start, and this will increase your chances of success in operating your newly formed limited partnership.
