Do you want to form a limited partnership (LP) in Colorado, but you’re not familiar with the formation process?
A limited partnership can be a great alternative to a general partnership, but the LP is definitely more difficult to form compared to the more casual nature of the general partnership. In this guide, we’ll discuss all the crucial details of forming this business type in Colorado.
There are several significant differences between the general partnership and the limited partnership (LP), starting with the roles of the partners themselves. With a general partnership, the partners split profits evenly and take equal responsibility when it comes to liability ― general partners are personally liable for the company’s debts and settlements.
With a limited partnership (not to be confused with the LLC), there is at least one general partner and one limited partner, which is the term for a partner that does not have managerial responsibilities, and their liability is limited to the amount of money they invested in the partnership.
Sometimes, you’ll hear limited partners referred to as “silent partners” due to their lack of direct involvement in the day-to-day operations of the company.
Another major difference is that the general partnership is not a formal business structure, which means you don’t even need to file formation documents with the state of Colorado, or pay any sort of formation fee. The general partnership is simply formed when the partners begin transacting business together.
On the other hand, a limited partnership does have a formal formation process with the Colorado state government, and there is also a formation fee involved.
Whereas the state of Colorado allows general partnerships to operate under the individual names of the partners, that is not the case for limited partnerships, which must have a distinct business name.
Your limited partnership’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
In Colorado, all limited partnerships must include one of the following terms or abbreviations in their business name: “limited partnership,” “limited,” “company,” “L.P.,” “LP,” “Ltd.,” or “Co.” In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Another aspect to consider is including language that explains what your business does ― for example, if you’re a realtor, put the phrase “real estate” in your LP name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your limited partnership’s name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LP is to not get too attached to any one business name until you have either reserved the name with the state of Colorado, or you’ve officially formed your business.
To acquire your desired business name in Colorado, you should begin by searching through the state business name database to determine whether your desired name is available. Once you have determined that your desired name is available, you can then formally reserve it when you file your Certificate of Limited Partnership, or if you are not yet ready to legally form your LP, you can reserve the name for 120 days by filing a Statement of Reservation of Name with the Colorado Secretary of State.
Every limited partnership in Colorado is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the Colorado Secretary of State,
Most entities on record with the Secretary of State must maintain a registered agent. The registered agent is the individual or business responsible for accepting service of process for an entity and isn’t necessarily an owner or director. The registered agent is responsible for forwarding service of process to the entity.”
Without a registered agent in Colorado, you could lose your good standing and the state also has the right to dissolve your LP if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
At the end of the day, we recommend designating a registered agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record.
At this point, it’s time to legally form your new limited partnership.
You will begin the process of legally forming your LP by filing a Certificate of Limited Partnership with the Colorado Secretary of State. To successfully complete this form, you will need to include the following information:
Colorado requires that all Certificates of Limited Partnership be submitted online. You can find the online form here.
Cost to Form an LP: The state of Colorado charges a filing fee of $50 to form a limited partnership.
Processing Time: Since you must file your Certificate of Limited Partnership online, your form will be processed immediately by the Colorado Secretary of State.
While not legally required by the state of Colorado, a limited partnership agreement outlines some of the key operating principles of the business. Even though you don’t have to submit it to the state to form your LP, it’s still a vital document that describes the exact nature of the agreement between the general partners and limited partners.
The information included in a limited partnership agreement does vary depending on the nature of your business, the size of your company, and some other variables. In general, it’s good to get the following information down in writing:
Limited partnerships require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LP functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LP for free through the IRS.
On the state level, your limited partnership taxes will depend on the nature and structure of your business.
The State of Colorado levies a state-level partnership income tax on certain limited partnerships. If your business must file a federal partnership income tax return or if one of your partners is not a resident of Colorado, then you may be subject to this tax.
Colorado also levies a number of business-specific taxes on limited partnerships. LPs that sell goods or products will need to register for state sales and use tax, and if your business is involved in certain industries, then you may need to pay industry-specific taxes, such as lodging taxes or controlled substance excise taxes.
To ensure that you fully understand your tax obligation in the State of Colorado, you should use Colorado’s handy online business resource, MyBizColorado. This online portal will allow you to register your business with the State of Colorado and automatically sign up for any taxes that you need to pay.
Depending on where in Colorado your business is located, you may also need to pay local taxes.
Most local governments have their own business requirements – including Colorado’s most populous cities, Denver, Colorado Springs, Aurora, and Fort Collins – so you should take the time to look at your city or county’s local business resources.
In Colorado, your LP does not need to register for a general business license. However, depending on your area of business, you may need certain industry-specific licenses.
Many state-regulated entities in Colorado must obtain a license to legally operate in the state. Businesses in industries from insurance to child care to rental vehicles need to apply for some kind of state-level license to operate compliantly.
Because the State of Colorado has a number of different licenses that may apply to your business, you should search the Colorado Department of Regulatory Agencies’ database for any licenses or permits relevant to your area of business. Additionally, Colorado’s online business portal, MyBizColorado, will allow you to see which state and local licenses may apply to your business.
If you would rather have a professional take care of your formation paperwork for you, you have a couple of options. The less expensive choice is to hire a business formation service to create your limited partnership.
While some service providers stick to less complicated business entities like limited liability companies, some also provide LP formations ― namely, LegalZoom and BizFilings. Currently ZenBusiness does not have this offering but does have regular LLC formation and business incorporation.
If you want the maximum possible degree of expertise, you should also consider hiring a business attorney to form your limited partnership. This is certainly a more expensive route, but if you want the peace of mind that every step is completed correctly ― and that all of your options have been thoroughly explored ― hiring a lawyer is a great option.
We highly recommend that you establish a business bank account so that your business and personal finances are maintained separately. This is important because it helps protect your personal assets, and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
In the State of Colorado, all business that hire employees must have both workers’ compensation insurance as well as unemployment insurance. If you require more information about either of these policies, you should consult the Colorado Department of Regulatory Agencies and the Colorado Department of Labor and Employment, respectively. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Limited partnerships do not file business tax returns. Instead, the income is passed through the business entity to the partners, who then claim their share of profits or losses on their personal tax returns. Still, LPs do need to file an annual information return with the IRS, in which you report your business income, deductions, gains, and losses for the year.
In Colorado, all LPs are required to file periodic reports on an annual basis. This report serves as an opportunity to update your business information with the State of Colorado as well as to maintain your LP’s good standing with the Secretary of State. When you file your periodic report, you will need to pay a small $10 filing fee.
We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.
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