Do you want to form a limited partnership (LP) in Michigan, 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 Michigan.
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 Michigan, 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 Michigan state government, and there is also a formation fee involved.
Whereas the state of Michigan 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 Michigan, all limited partnerships are required by law to include the words “limited partnership” in the name with no abbreviation. 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 Michigan, or you’ve officially formed your business.
Before reserving the name, however, you’ll want to check its availability with the Business Entity Search database. If the name is available, you may move forward with reserving it by filing an Application of Reservation of Name. After filing the document and paying the fee of $10 the name will be reserved for your limited partnership.
Every limited partnership in Michigan 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 Michigan Secretary of State,
Each limited partnership shall continuously maintain in this state both of the following: (1) An office, which may be but need not be a place of its business in this state, at which shall be kept the records required by section 106 to be maintained. (2) An agent for service of process on the limited partnership, which agent must be an individual resident of this state, a domestic corporation, or a foreign corporation authorized to do business in this state.”
Without a registered agent in Michigan, 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 two or more individuals to execute a document known as the Certificate of Limited Partnership. Michigan requires the following information to appear on the document:
You can complete the Certificate of Limited Partnership here as a pdf and submit it either by mail to the Michigan Department of Licensing and Regulatory Affairs or through the Corporations Online Filing System.
Cost to Form an LP: The state of Michigan charges a filing fee of $10 to form a limited partnership.
Processing Time: Processing time for the Certificate of Limited Partnership will depend on how the document was submitted. While there is no standard processing time, you choose to expedite the process for an additional cost if you wish.
While not legally required by the state of Michigan, 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 limited partnership taxes in Michigan are levied based on what type of business you are operating and what goods/services are being sold.
Most limited partnerships that sell any type of taxable goods or service will be required to register for and pay sales and use tax. If your business has any number of employees, employer taxes will also likely be necessary.
Determining which state taxes apply to your limited partnership may seem overwhelming, but thankfully the Michigan Department of Treasury has extensive information on its taxation policies and procedures on its Business Tax Section.
Depending on where in Michigan your business is located, you may also need to pay local taxes.
Some larger municipalities such as Detroit, Grand Rapids, and Lansing have their own business tax requirements that your limited partnership will need to meet.
Michigan has no general business license that will meet all requirements necessary to allow your general partnership to operate within the state; instead, you may be required to obtain one or several regulatory or professional licenses determined by the nature of your business.
Most state-level Michigan permits are industry-specific and range from licenses for funeral directors to permits for polygraph examiners. To search the database of Michigan licenses and determine which may apply to you, use the State License Search located on the Michigan State website.
In addition to industry-specific regulatory licenses, you may need to apply for one or more occupational licenses. More information on occupational licenses and others can be found through LARA, the state’s licensing resource.
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 you have even one employee, it’s likely you will be required to carry a couple types of employer insurance. One of which is unemployment insurance, which must be paid online by creating an Unemployment Insurance Account with the Michigan Department of Licensing and Regulatory Affairs. Additionally, Michigan employers are required to carry workers’ compensation insurance, which is primarily handled by the state’s Workers’ Compensation Agency (WCC). 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 contrast to many other states, Michigan has no annual report requirements for limited partnerships.
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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