Do you want to form a limited partnership (LP) in Delaware, 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 Delaware.
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 Delaware, 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 Delaware state government, and there is also a formation fee involved.
Whereas the state of Delaware 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:
Limited partnerships formed in Delaware are required to include the words “limited partnership” in the name or the abbreviation “L.P.” or “LP”. 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 Delaware, or you’ve officially formed your business.
Delaware allows limited partnerships to reserve their intended names by filing the Application for Reservation of Limited Partnership Name with the Delaware Division of Corporations. It should be noted, however, that in order to reserve a name you must confirm the name is available by searching it on the state’s General Information Name Search.
Filing the document costs $75 and reserves the name for a period of 120 days.
Every limited partnership in Delaware 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 Delaware Secretary of State,
The legal requirements to be a Registered Agent in Delaware are to maintain a street address and office located in Delaware and be open during normal business hours for the purpose of accepting service of process according to 8 Del. C. § 132. Consumers are encouraged to exercise due diligence in researching the Registered Agent prior to selecting them for representation. It is incumbent upon the consumer to contact the Registered Agent prior to filing.”
Without a registered agent in Delaware, 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.
The formation of your limited partnership is made quite easy through the Certificate of Limited Partnership. The document is extremely straightforward and requires only the following information:
The Certificate of Limited Partnership can be completed online as a PDF file and mailed to the Delaware Division of Corporations.
Cost to Form an LP: The state of Delaware charges a filing fee of $200 to form a limited partnership.
Processing Time: Delaware states no standard processing time for the Certificate of Limited Partnership document. Inquiries regarding processing times may be directed toward the Delaware Division of Corporations.
While not legally required by the state of Delaware, 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.
Generally speaking, most state-level taxes that will apply to your limited partnership are determined largely based on what goods or services it provides. Depending on the nature of the business, it may be required to pay motor vehicle tax, rental property tax, retail tax, or other industry-specific taxes.
One tax that applies to all Delaware businesses (including limited partnerships) is the Annual tax. This tax is a base-rate of $300 and must be paid each year along with any other industry-specific taxes.
When it comes to determining your limited partnership’s state-level tax liabilities, Delaware makes the process quite simple by providing plenty of information and online help. For additional assistance with your state business taxes, visit the Tax Information page of the Delaware Division of Corporations.
Depending on where in Delaware your business is located, you may also need to pay local taxes.
In some cases, cities have their own tax requirements that Delaware limited partnerships must meet. For example, Wilmington and Dover each have their own local tax standards.
In the state of Delaware, there is a general business license that all businesses in the state (including limited partnerships) must obtain in order to operate lawfully. This license can be obtained either online through the One Stop Business Registration and Licensing system of by filing the Combined Registration Application by mail. In addition to this license, one or several other industry-related regulatory or occupational licenses may be necessary.
Thankfully, Delaware makes establishing your business’s licensing requirements a straightforward process through the state’s One Stop Business Registration and Licensing system. Using the system, business owners are able to determine which licenses they need to obtain and receive information on registering for them.
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.
If your Delaware limited partnership has one or more employees, you’ll be required to carry at least two types of insurance: workers’ compensation insurance and unemployment insurance. Both of these can be researched and obtained quite easily through the state’s One Stop Business Registration and Licensing system. 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.
Unlike many other states, limited partnerships in Delaware are not required to file any type of annual report in order to remain in good standing with the state.
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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