Do you want to form a limited partnership (LP) in Massachusetts, 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 Massachusetts.
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 Massachusetts, 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 Massachusetts state government, and there is also a formation fee involved.
Whereas the state of Massachusetts 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 Massachusetts, limited partnerships are required to include the phrase “limited partnership” in the name. No abbreviations are permitted. 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 Massachusetts, or you’ve officially formed your business.
First, you’ll want to check your name’s availability by searching it on the corporate database of business names, the reserved name database, and the state trademark database. After asserting that your name is available for use on all three databases, you may claim it by filing an Application of Reservation of Name with the Commonwealth of Massachusetts. The document may be submitted either by mail or in person.
Every limited partnership in Massachusetts 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 Massachusetts Secretary of State,
Every limited partnership operating within the state is required to have an agent for service of process. Agents are permitted to be individual residents or a qualifying business entity. In either case, the registered agent is required to have a physical street address within Massachusetts.”
Without a registered agent in Massachusetts, 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.
Doing so requires the filing of a Limited Partnership Certificate with the Commonwealth of Massachusetts. This is an extremely straightforward document consisting of two pages, that requires the following information:
In order to complete the Limited Partnership Certificate, you may either fill it out as a pdf and mail it, or file it online using the Corporations Online Filing System.
Cost to Form an LP: The state of Massachusetts charges a filing fee of $200 to form a limited partnership.
Processing Time: There is no listed wait time for the Limited Partnership Certificate; inquiries regarding processing periods may be directed toward the Secretary of the Commonwealth of Massachusetts.
While not legally required by the state of Massachusetts, 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.
Most state-level taxes in Massachusetts are determined based on your business practices and what goods/services your limited partnership offers.
In most cases, limited partnerships operating within Massachusetts will be required to register for sales and use tax and other industry-specific taxes such as cigarette and tobacco excise or motor fuel excise. If your business has any number of employees, employer taxes will also be mandatory.
Determining which taxes apply to your limited partnership and figuring out how to pay them might initially seem a bit overwhelming. Fortunately, the Commonwealth of Massachusetts makes the tax process quite easy. By registering with the Massachusetts Department of Revenue through the state’s MassTaxConnect, you’ll be informed of all your state-level tax requirements as well as receiving instruction on how to pay them.
Depending on where in Massachusetts your business is located, you may also need to pay local taxes.
To ensure you’re meeting all local tax requirements, you’ll want to check the tax requirements of the city or county in which your limited partnership operates.
While Massachusetts has no general business license that will authorize your limited partnership to perform business transactions in the state, there are many other professional and regulatory licenses you may be required to obtain.
Fortunately, Massachusetts makes determining your state-level license requirements quite easy through its online resources. Information on professional and regulatory licenses can be found on the Professional Licenses & Permits Page of the Massachusetts government website and through the Massachusetts Permit Regulatory Office (MPRO) respectively.
In addition to state-level licenses, you’ll also want to check with the city or county clerk of the municipality in which your limited partnership operates to ensure you’re meeting all local licensing and permit standards.
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.
Depending on whether you Massachusetts limited partnership has employees (and how many employees it has) you will likely be required to obtain several different types of insurance. In Massachusetts, employers are only required to provide health insurance to employees if they have more than fifty full-time employees; otherwise, it is not required. If your limited partnership has any number of employees it will likely need to carry both workers’ compensation insurance and unemployment insurance. Information on each of these may be found on the Massachusetts Government Website on either the Workers’ Compensation Requirements Page or the Unemployment Insurance for Employers Section 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.
Massachusetts requires all limited partnerships to file an annual report in order to remain in good standing. This must be done on or before the anniversary date of the business’s formation, and requires a filing fee of $450 if filed online or $500.00 when filed by paper. To complete your annual report, you may either complete the document as a PDF or file online using the Corporations Online Filing System.
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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