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 Kentucky, 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 Kentucky state government, and there is also a formation fee involved.
Whereas the state of Kentucky 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 the state of Kentucky, every limited partnership is required to have one of the following words, phrases, or abbreviations in the business name: “limited,” “limited partnership,” “Ltd.,” 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 Kentucky, or you’ve officially formed your business.
Kentucky makes this process rather easy, as you can search their entire state business database at this link, and if you’re not yet ready to form your LP, you can reserve your desired name with the Application for a Reservation or Renewal of Reserved Name form.
Every limited partnership in Kentucky 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 Kentucky Secretary of State,
each entity must designate a registered agent and registered office in Kentucky upon whom process (such as summons and subpoenas) may be served. Service on the registered agent is deemed to be service on the entity, regardless whether the registered agent actually forwards the notice to the entity.”
Without a registered agent in Kentucky, 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.
To do so, you’ll need to file a document known as the Certificate of Limited Partnership with the state of Kentucky. This simple one-page form officially creates your LP, and it includes these important pieces of info:
To prepare your Certificate of Limited Partnership, you can print off the pdf and fill it out with your company’s information.
Cost to Form an LP: The state of Kentucky charges a filing fee of $40 to form a limited partnership.
Processing Time: Typically, it will take 3-4 business days for the Secretary of State to process your formation upon receiving your completed Certificate of Limited Partnership.
While not legally required by the state of Kentucky, 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.
When it comes to state-level limited partnership taxes, Kentucky levies these taxes based on the nature of your business.
One that every LP needs is the limited liability tax. In addition, most LPs will need to register for sales and use tax, and if you have employees you’ll need employer’s withholding tax as well. Beyond that, there are many industry-specific taxes like the telecommunications tax, transient room tax, motor vehicle tire tax, etc.
While determining which ones you need and then registering for them may sound like a headache, Kentucky makes the entire process very easy. All you need to do is fill out an online form on their “One Stop Registration” page, and they’ll automatically enroll you for the taxes that apply to your business.
Depending on where in Kentucky your business is located, you may also need to pay local taxes.
The largest cities in Kentucky all have their own online business resources ― including Louisville, Lexington, Bowling Green, and Paducah ― so don’t overlook this potentially crucial step.
The state of Kentucky does not have a general business license that each entity needs to acquire in order to do business.
However, much like the state has industry-specific tax requirements, it also has licenses and permits that are required for businesses in certain industries. Kentucky has hundreds of these licenses, so there’s a good chance at least one of them applies to your limited partnership.
We recommend that every LP owner search through the state database of occupational permits and licenses, and don’t forget that your local government may require licenses or permits as well. You can get more information on county-level licenses at this link.
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.
Every Kentucky business with employees is strictly required to acquire unemployment insurance and workers’ compensation insurance. For more information on either of these policies, check out the Division of Unemployment Insurance or the Department of Workers’ Claims, 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.
Kentucky requires that all limited partnerships file an annual report. If you would like to file your annual report online, you can do so with the Kentucky Secretary of State’s FastTrack system. Your annual report will essentially serve to update the state on any pertinent information regarding your business that has changed over the course of the year. Finally, there is a nominal $15 fee associated with each annual report filing.
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.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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